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Full text of "Taxation The Peoples Business"

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OSMANIA UNIVERSITY LIBRARY 

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vjau iNo. j^O'^/fii >st /Accession No. 4 X / *f 

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last narked below. 



TAXATION: 
THE PEOPLE'S BUSINESS 



THE MACMILLAN COMPANY 

NEW YORK BOSTON CHICAGO DALLAS 
AILANTA SAN FRANCISCO 

MACMILLAN & CO., LIMITED 

LONDON BOMBAY CALCUTTA 
MELBOURNE 

TIIE MACMILLAN CO. OF CANADA. LTD. 

TORONTO 



TAXATION: 
THE PEOPLE'S BUSINESS 



BY 

ANDREW W. MELLON 



gfocfc 

THE MACMILLAN COMPANY 
1924 

All rights reserved 



COPYRIGHT, 1924, 
Br THE MAOMILLAN COMPANY. 



Set up and printed. 
Published April, 1924. 



Printed in the United States of America by 

J. J. LITTLE AND IVES COMPANY, NEW YORK 



PREFACE 

Many of the views on taxation herein ex- 
pressed have appeared from time to time in 
letters to Committees of Congress and to 
various organizations and individuals. It 
has seemed worth while to collect these views 
and publish them in a compact form, to which 
are appended also various tables and docu- 
ments of possible interest to students of taxa- 
tion. I am indebted to The Forwm magazine, 
The Independent, and others for permission 
to publish excerpts from articles. I also wish 
to express my indebtedness to Mr. S. Parker 
Gilbert, former Under Secretary of the 
Treasury, and to the Under Secretary of 
the Treasury, Mr. Garrard B. Winston, for 
the invaluable assistance which he has ren- 
dered not only in the preparation of this 
book but in the conduct of the public business 
of the Treasury. 

A. W. MELLON. 
Washington, 
April, 1924. 



CONTENTS 

CHAPTER PAGI 

I FUNDAMENTAL PRINCIPLES .... 9 

II THE \SURY POLICIES 25 

III REVISING THE TAXES 51 

IV SURTAXES 69 

V TAXING ENERGY AND INITIATIVE . . 93 

VI ESTATE TAXES Ill 

VII BENEFITS OF TAX REDUCTION . . . 127 

VIII TAX-EXEMPT SECURITIES .... 141 
APPENDIX 175 



CHAPTER I 
FUNDAMENTAL PEINCIPLES 



TAXATION: THE PEOPLE'S 
BUSINESS 

CHAPTJBR I 

FUNDAMENTAL PBINCIPI^ES 

THE problem of the Government is to fix 
rates which will bring in a maximum amount 
of revenue to the Treasury and at the same 
time bear not too heavily 011 the taxpayer or 
on business enterprises. A sound tax policy 
must take into consideration three factors. 
It must produce sufficient revenue for the 
Government; it must lessen, so far as possi- 
ble, the burden of taxation on those least 
able to bear it ; and it must also remove those 
influences which might retard the continued 
steady development of business and industry 
on which, in the last analysis, so much of our 
prosperity depends. Furthermore, a perma- 

9 



10 TAXATION: THE PEOPLE'S BUSINESS 

nent tax system should be designed not 
merely for one or two years nor for the effect 
it may have on any given class of taxpayers, 
but should be worked out with regard to 
conditions over a long period and with a 
view to its ultimate effect on the prosperity 
of the country as a whole. 

These are the principles on which the 
Treasury's tax policy is based, and any re- 
vision of taxes which ignores these funda- 
mental principles will prove merely a make- 
shift and must eventually be replaced by a 
system based on economic, rather than po- 
litical, considerations. 

There is no reason why the question of 
taxation should not be approached from a 
non-partisan and business viewpoint. In re- 
cent years, in any discussion of tax revision, 
the question which has caused most contro- 
versy is the proposed reduction of the sur- 
taxes. Yet recommendations for such re- 
ductions have not been confined to either 
Republican or Democratic administrations. 
My own recommendations on this subject 



FUNDAMENTAL PKINCIPLES 11 

were in line with similar ones made by 
Secretaries Houston and Glass, both of whom 
served under a Democratic President. Tax 
revision should never be made the football 
either of partisan or class politics but should 
be worked out by those who have made a 
careful study of the subject in its larger 
aspects and are prepared to recommend the 
course which, in the end, will prove for the 
country's best interest. 

I have never viewed taxation as a means 
of rewarding one class of taxpayers or pun- 
ishing another. If such a point of view ever 
controls our public policy, the traditions of 
freedom, justice and equality of opportunity, 
which are the distinguishing characteristics 
of our American civilization, will have dis- 
appeared and in their place we shall have 
class legislation with all its attendant evils. 
The man who seeks to perpetuate prejudice 
and class hatred is doing America an ill serv- 
ice. In attempting to promote or to defeat 
legislation by arraying one class of taxpay- 
ers against another, he shows a complete 



12 TAXATION: THE PEOPLE'S BUSINESS 

misconception of those principles of equality 
on which the country was founded. Any man 
of energy and initiative in this country can 
get what he wants out of life. But when that 
initiative is crippled by legislation or by a 
tax system which denies him the right to 
receive a reasonable share of his earnings, 
then he will no longer exert himself and the 
country will be deprived of the energy on 
which its continued greatness depends. 

This condition has already begun to make 
itself felt as a result of the present unsound 
basis of taxation. The existing tax system 
is an inheritance from the war. During that 
time the highest taxes ever levied by any 
country were borne uncomplainingly by the 
American people for the purpose of defray- 
ing the unusual and ever-increasing expenses 
incident to the successful conduct of a great 
war. Normal tax rates were increased, and 
a system of surtaxes was evolved in order to 
make the man of large income pay more pro- 
portionately than the smaller taxpayer. If 
he had twice as much income, he paid not 



FUNDAMENTAL PRINCIPLES 13 

twice, but three or four times as much tax. 
For a short time the surtaxes yielded a large 
revenue. But since the close of the war peo- 
ple have come to look upon them as a busi- 
ness expense and have treated them accord- 
ingly by avoiding payment as much as pos- 
sible. The history of taxation shows that 
taxes which are inherently excessive are not 
paid. The high rates inevitably put pressure 
upon the taxpayer to withdraw his capital 
from productive business and invest it in 
tax-exempt securities or to find other law- 
ful methods of avoiding the realization of 
taxable income. The result is that the 
sources of taxation are drying up ; wealth is 
failing to carry its share of the tax burden; 
and capital is being diverted into channels 
which yield neither revenue to the Govern- 
ment nor profit to the people. 

Before the period of the war, taxes as high 
as those now in effect would have been 
thought fantastic and impossible of payment. 
As a result of the patriotic desire of the 
people to contribute to the limit to the sue- 



14 TAXATION: THE PEOPLE'S BUSINESS 

cessful prosecution of the war, high taxes 
were assessed and ungrudgingly paid. Upon 
the conclusion of peace and the gradual re- 
moval of war-time conditions of business, the 
opportunity is presented to Congress to 
make the tax structure of the United States 
conform more closely to normal conditions 
and to remove the inequalities in that struc- 
ture which directly injure our prosperity 
and cause strains upon our economic fabric. 
There is no question of the fact that if the 
country is to go forward in the future as it 
has in the past, we must make sure that all 
retarding influences are removed. 

Adam Smith, in his great work, " Wealth 
of Nations/' laid down as the first maxim 
of taxation that "The subjects of every state 
ought to contribute toward the support of 
the Government, as nearly as possible, in 
proportion to their respective abilities, " and 
in his fourth and last maxim, that " Every 
tax ought to be so contrived as both to take 
out and to keep out of the pockets of the 
people as little as possible over and above 



FUNDAMENTAL PRINCIPLES 15 

what it brings into the public treasury of 
the state," citing as one of the ways by 
which this last maxim is violated a tax which 
"may obstruct the industry of the people, 
and discourage them from applying to cer- 
tain branches of business which might give 
maintenance and employment to great mul- 
titudes. . . . While it obliges the people to pay, 
it may thus diminish, or perhaps destroy, 
some of the funds, which might enable them 
more easily to do so." 

The further experience of one hundred 
and fifty years since this was written has 
emphasized the truth of these maxims, but 
those who argue against a reduction of sur- 
taxes to more nearly peace-time figures cite 
only the first maxim, and ignore the fourth. 
The principle that a man should pay taxes 
in accordance with his "ability to pay" is 
sound but, like all other general statements, 
has its practical limitations and qualifica- 
tions, and when, as a result of an excessive 
or unsound basis of taxation, it becomes evi- 
dent that the source of taxation is drying 



16 TAXATION: THE PEOPLE'S BUSINESS 

up and wealth is being diverted into unpro- 
ductive channels, yielding neither revenue 
to the Government nor profit to the people, 
then it is time to readjust our basis of taxa- 
tion upon sound principles. 

It seems difficult for some to understand 
that high rates of taxation do not necessarily 
mean large revenue to the Government, and 
that more revenue may often be obtained by 
lower rates. There was an old saying that 
a railroad freight rate should be "what the 
traffic will bear"; that is, the highest rate at 
which the largest quantity of freight would 
move. The same rule applies to all private 
businesses. If a price is fixed too high, sales 
drop off and with them profits ; if a price is 
fixed too low, sales may increase, but again 
profits decline. The most outstanding recent 
example of this principle is the sales policy 
of the Ford Motor Car Company. Does any 
one question that Mr. Ford has made more 
money by reducing the price of his car and 
increasing his sales than he would have 
made by maintaining a high price and a 



FUNDAMENTAL PEINCIPLES 17 

greater profit per car, but selling less cars? 
The Government is just a business, and 
can and should be run on business prin- 
ciples. 

Experience has shown that the present 
high rates of surtax are bringing in each 
year progressively less revenue to the Gov- 
ernment. This means that the price is too 
high to the large taxpayer and he is avoiding 
a taxable income by the many ways which 
are available to him. What rates will bring 
in the largest revenue to the Government ex- 
perience has not yet developed, but it is 
estimated that by cutting the surtaxes in 
half, the Government, when the full effect 
of the reduction is felt, will receive more 
revenue from the owners of large incomes 
at the lower rates of tax than it would have 
received at the higher rates. This is simply 
an application of the same business prin- 
ciple referred to above, just as Mr. Ford 
makes more money out of pricing his cars at 
$380 than at $3,000. 

Looking at the subject, therefore, solely 



18 TAXATION: THE PEOPLE'S BUSINESS 

from the standpoint of Government rev- 
enues, lower surtax rates are essential. If 
we consider, however, the far more impor- 
tant subject of the effect of the present high 
surtax rates on the development and pros- 
perity of our country, then the necessity for 
a change is more apparent. The most note- 
worthy characteristic of the American peo- 
ple is their initiative. It is this spirit which 
has developed America, and it was the same 
spirit in our soldiers which made our armies 
successful abroad. If the spirit of business 
adventure is killed, this country will cease 
to hold the foremost position in the world. 
And yet it is this very spirit which excessive 
surtaxes are now destroying. Any one at 
all in touch with affairs knows of his own 
knowledge of buildings which have not been 
built, of businesses which have not been 
started, and of new projects which have been 
abandoned, all for the one reason high sur- 
taxes. If failure attends, the loss is borne 
exclusively by the adventurer, but if success 
ensues, the Government takes more than 



FUNDAMENTAL PRINCIPLES 19 

half of the profits. People argue the risk is 
not worth the return. 

With the open invitation to all men who 
have wealth to be relieved from taxation by 
the simple expedient of investing in the more 
than $12,000,000,000 of tax-exempt securities 
now available, and which would be unaf- 
fected by any Constitutional amendment, the 
rich need not pay taxes. We violate Adam 
Smith's first maxim. Where these high sur- 
taxes do bear, is not on the man who has 
acquired and holds available wealth, but on 
the man who, through his own initiative, is 
making wealth. The idle man is relieved ; the 
producer is penalized. We violate the fourth 
maxim. We do not reach the people in pro- 
portion to their ability to pay and we de- 
stroy the initiative which produces the 
wealth in which the whole country should 
share, and which is the source of revenue to 
the Government. 

In considering any reduction the Govern- 
ment must always be assured that taxes will 
not be so far reduced as to deprive the Treas- 



20 TAXATION: THE PEOPLE'S BUSINESS 

ury of sufficient revenue with which properly 
to run its business with the manifold activ- 
ities now a part of the Federal Government 
and to take care of the public debt. Tax 
reduction must come out of surplus revenue. 
In determining the amount of surplus avail- 
able these factors control: the revenue re- 
maining the same, an increase in expendi- 
tures reduces the surplus, and expenditures 
remaining the same, anything which reduces 
the revenue reduces the surplus. The reac- 
tion, therefore, of the authorization of 
extraordinary or unsound expenditures is 
twofold it serves, first, to raise the expen- 
ditures and so narrow the margin of avail- 
able surplus ; and, second, to decrease further 
or obliterate entirely this margin by a re- 
duction of the Treasury's revenues through 
the disturbance of general business, which 
is promptly reflected in the country's income. 
On the other hand, a decrease of taxes 
causes an inspiration to trade and commerce 
which increases the prosperity of the coun- 
try so that the revenues of the Government, 



FUNDAMENTAL PRINCIPLES 21 

even on a lower basis of tax, are increased. 
Taxation can be reduced to a point appar- 
ently in excess of the estimated surplus, be- 
cause by the cumulative effect of such 
reduction, expenses remaining the same, a 
greater revenue is obtained. 

High taxation, even if levied upon an eco- 
nomic basis, affects the prosperity of the 
country, because in its ultimate analysis the 
burden of all taxes rests only in part upon 
the individual or property taxed. It is 
largely borne by the ultimate consumer. 
High taxation means a high price level and 
high cost of living. A reduction in taxes, 
therefore, results not only in an immediate 
saving to the individual or property directly 
affected, but an ultimate saving to all people 
in the country. It can safely be said, that a 
reduction in the income tax reduces expenses 
not only of the income taxpayers but of the 
entire 110,000,000 people in the United 
States. It is for this basic reason that the 
present question of tax reform is not how 
much each individual taxpayer reduces his 



22 TAXATION: THE PEOPLE'S BUSINESS 

direct contribution, although this, of course, 
is a powerful influence upon the individual 
affected; the real problem to determine is 
what plan results in the least burden to the 
people and the most revenue to the Govern- 
ment. 



CHAPTER II 
TREASURY POLICIES 



CHAPTER II 
TREASURY POLICIES 

SINCE the war two guiding principles have 
dominated the financial policy of the Govern- 
ment. One is the balancing of the budget, and 
the other is the payment of the public debt. 
Both are in line with the fundamental policy 
of the Government since its beginning. 

Alexander Hamilton, whose genius was re- 
sponsible for the establishment of our finan- 
cial system, early committed this Government 
to a policy of debt payment and keeping ex- 
penditures within income. "It will be the 
truest policy of the United States, " he said, 
"to give all possible energy to public credit 
by a firm adherence to its strictest maxims ; 
and yet, to avoid the ills of an excessive em- 
ployment of it, by true economy and system 
in the public expenditure, by steadily culti- 
vating peace, and by using sincere, efficient 

25 



26 TAXATION: THE PEOPLE'S BUSINESS 

and persevering endeavors to diminish pres- 
ent debts, prevent the accumulation of new 
and secure the discharge, within a reasonable 
period, of such as it may be at any time a 
matter of necessity to contract." 

In accordance with this policy the nation 
from the very beginning began to pay its 
debts. Under Hamilton's leadership the 
debts incurred by the various States in the 
prosecution of the Revolutionary War were 
assumed by the new nation then struggling 
into existence, and immediate provisions 
were made for funding and gradually liqui- 
dating these obligations. Hamilton proposed 
a sinking fund, through whose operation, 
with later modifications, the debt was dis- 
charged within a reasonable number of years. 

The policy thus inaugurated has been ad- 
hered to by succeeding administrations. Out 
of surplus revenues the public debt has been 
gradually paid off, so that at the time of our 
entrance into the World War, in April, 1917, 
the net public debt was slightly more than 
one billion dollars. The United States fol- 



TREASURY POLICIES 27 

lowed its traditional policy of financing the 
war partly by taxation and partly by bor- 
rowing. In accordance with this policy the 
Government raised money in the following 
manner: (1) by borrowing on long-time 
bonds; (2) by increasing taxation sufficiently 
to meet all debt charges out of current in- 
come; and (3) by issuing Treasury certifi- 
cates to raise funds until the proceeds from 
the loans and taxes should become available. 
So far as possible, inflation was avoided 
by observing the principle that war loans, ob- 
tained by credit, must rest on the solid basis 
of taxation. Taxes were increased sufficiently 
to provide at least for interest on the loans 
and payment on a sinking fund which will 
discharge the debt in a reasonable period. 
Some inflation, however, was unavoidable, for 
loans, so far as they are not paid out of sav- 
ings but by the banks or by individuals with 
advances from the banks, lead to inflation; 
and likewise taxes on income, so high that 
business is forced to borrow from the banks 
in order to make payment, also add to infla- 



28 TAXATION: THE PEOPLE'S BUSINESS 

tion. Most of the European countries, except 
Great Britain, attempted to finance the war 
largely on borrowing. America, on the other 
hand, attempted to raise one-third of the cur- 
rent war expenditures by taxation. 

During the war many new taxes, such as 
Income and Excess Profits Taxes, were de- 
veloped. There is a limit, however, to the 
amount of taxes that can be levied without 
absorbing the profits which should be put 
back into business for increased production. 
That limit is measured, not by the total in- 
come of the consumer, but by the surplus 
income which is the excess of net income over 
consumption. If too much of this surplus 
is taken in taxes, the margin available for 
capital investment and for support of edu- 
cational, religious and philanthropic insti- 
tutions is perilously reduced. If the sources 
of capital investment are dried up, the flow 
of all income may eventually cease. For 
these reasons the Government must judge 
with great care the amount of tax to be levied 
on wealth. 



TREASURY POLICIES 29 

The cost of a great war, however, cannot 
be borne entirely by taxes. It must be 
financed in part by credit, which can be ac- 
complished by long-time loans. In this way, 
the burden can be distributed over a term 
of years in such a way that too great pay- 
ment does not fall on the taxpayers of any 
one year. Throughout its history the United 
States has followed the policy laid down by 
Hamilton of so funding the public debt that 
it can be liquidated without undue hardship. 
At the same time, the policy has been strictly 
adhered to that expenditures for the ordinary 
operations of the Government must be dis- 
charged out of current receipts raised from 
taxes. Part of the public debt must be paid 
each year out of current revenues, and such 
debt as is not paid off must be refunded and 
the whole eventually extinguished by paying 
from year to year the amounts accumulated 
in the sinking fund. The amount of the 
yearly payments must be determined by the 
taxes levied for the purpose, and the rate of 
taxation should at no time be so excessive as 



30 TAXATION: THE PEOPLE'S BUSINESS 

to discourage the hope of gain on the part of 
the individual taxpayer. 

Many people cling to the old policy that 
debt retirement is bad for business, being 
the reverse of inflated conditions accom- 
panying vast borrowings. They hold that 
new borrowings with reduced taxes are pref- 
erable to higher taxes with reduced debts. 
But a moment's reflection will convince any 
one that prosperity cannot come from con- 
tinued plunging into debt. The present con- 
dition of Germany is the best proof of the 
danger of inflation and financial pyramiding. 
As a matter of fact, orderly debt retirement 
out of surplus revenues is better calculated 
to restore prosperity, for the debt is retired 
by taxes paid in for the purpose and the 
money retained for the payment of such taxes 
is saved from being dissipated in useless ex- 
penditure. The payment of debts is particu- 
larly desirable when the nation's obligations, 
as in the case of the United States, arc owed 
to its own people. All payments of interest 
and principal are put back into circulation 



TREASURY POLICIES 31 

within the country. It may seem to be tak- 
ing money out of one pocket in the form of 
taxes and putting it back in the other pocket 
in the guise of interest and part payment of 
the principal on bonds. But there are two 
distinctions to be noted: (1) not every tax- 
payer owns bonds, hence it is an advantage 
for the Government no longer to support the 
bondholders by the payment of interest col- 
lected as taxes from the nation at large; (2) 
the payments of principal on bonds are in 
sums that will find their way back into capi- 
tal investments, whereas, if no payments are 
made and taxes remain uncollected, this 
amount will be dissipated as income in useless 
expenditures. 

T.he United States has followed a sound 
policy in regard to payment of the war debt. 
It has appropriated annually a sum in ex- 
cess of interest charges, the surplus being de- 
voted to the reduction of the principal of the 
debt. The keynote of its policy in this re- 
gard, as the late President Harding stated in 
his first address to Congress, has been "or- 



32 TAXATION: THE PEOPLE'S BUSINESS 

derly funding and gradual liquidation." In 
the five full fiscal years since the end of hos- 
tilities in the World War, the Government 
has been able to balance its budget and the 
Treasury has therefore been in the position 
to make important progress within the same 
period in the handling of the war debt. On 
April 30, 1921, when the Treasury announced 
its refunding program, the gross public debt 
amounted to about 24 billion dollars, of which 
over TVa billion dollars was short-dated debt 
maturing within about two years. The Treas- 
ury was faced with the necessity not only of 
relieving business of the heavy tax burden 
imposed during the war but also of retiring 
or refunding the early maturing debt with- 
out disturbance to business and industry. 

The Treasury completed during the fiscal 
year ending June 30, 1923, the first phase of 
its refunding program, and by the end of the 
year all of the $7,500,000,000 of short-dated 
debt maturing during the previous two and 
one-half years had been either retired or re- 
funded into more manageable maturities. 



TREASURY POLICIES 33 

Except for the issue of about $750,000,000 of 
25-30 year Treasury bonds in the fall of 1922, 
the refunding has all been on a short-term 
basis, and it has been arranged with a view 
to distributing the early maturities of debt 
at convenient intervals over the period be- 
fore the maturity of the third Liberty Loan 
in 1928 in such manner that surplus revenues 
may be applied most effectively to the grad- 
ual reduction of the debt.. With this object 
in view all of the short-term notes issued in 
the course of the refunding have been given 
maturities on quarterly tax-payment dates, 
and all outstanding issues of Treasury certifi- 
cates have likewise been reduced to tax ma- 
turities. 

The following table shows in summary 
form the distribution of the interest-bearing 
debt by maturities at various dates since 
August 31, 1919, when the gross debt reached 
the peak. From this table it will be seen that 
on March 31, 1924, the public debt had been 
reduced nearly five billion dollars from its 
highest point in 1919. In place of the old 



34 TAXATION: THE PEOPLE'S BUSINESS 



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TREASURY POLICIES 35 

short-dated debt, there has been substituted 
a new class of short-dated debt, aggregating 
on March 31, 1924, about $8,327,000,000, ma- 
turing within five years from that date. 

This Government has followed the sound 
policy of balancing its budget from year to 
year, ordinary receipts against ordinary ex- 
penditures, and including as ordinary expen- 
ditures for budget purposes the sinking fund 
and other debt retirements properly charge- 
able against ordinary receipts. This means 
that provision must be made for expenditures 
on account of interest and retirement of the 
war debt before the Budget can balance ; and 
a balanced budget each year indicates a rea- 
sonable amount of debt retirement out of cur- 
rent revenues. To do otherwise would, of 
course, make a farce of the sinking fund, for 
on any other basis purchases of obligations 
for retirement on this account would accom- 
plish no debt retirement whatever and would 
mean simply a shifting of borrowing from 
one form to another. 

Under the Budget system it is now pos- 



36 TAXATION: THE PEOPLE'S BUSINESS 

sible for the Treasury to know in advance 
approximately the aggregate of expenditures 
for which it must provide funds during the 
year. To become completely effective the 
Budget should embrace all Government ex- 
penditures, including those which, in the 
guise of revolving funds and indefinite ap- 
propriations, do not now appear in the 
Budget at all. 

The Budget cannot reflect the true state of 
Government finances until Congress puts an 
end to the practice, initiated during the war, 
of authorizing expenditures by means of in- 
definite or revolving-fund appropriations. 
The Constitution expressly provides that "no 
money shall be drawn from the Treasury but 
in consequence of appropriations made by 
law; and a regular statement of the receipts 
and expenditures of all public money shall be 
published from time to time." This Consti- 
tutional requirement has been evaded by di- 
verting Government funds before they are 
covered into the Treasury. At the same time 
the Treasury is rendered unable to perform 



TREASURY POLICIES 37 

its Constitutional function of publishing "a 
regular statement of the receipts and expen- 
ditures of all public money." 

Such indefinite appropriations not only con- 
ceal how much money is being spent, but fre- 
quently conceal even the fact of an appropri- 
ation being made. By means of indirect and 
indefinite appropriations of this character, 
hundreds of millions are spent which, if a 
direct appropriation were necessary, could 
never be authorized. In fact the practice has 
reached such proportions as to be a matter of 
grave concern, and it was vigorously de- 
nounced by President Harding in one of his 
annual messages. It has become the first 
principle of strategy on the part of people 
interested in appropriations for various spe- 
cial purposes to frame the matter so as to 
authorize the use of the public funds indi- 
rectly, or in indefinite terms, or by authoriza- 
tions for expenditure of unexpended balances, 
perhaps appropriated originally for other 
purposes, or by authorizations to divert Gov- 
ernment receipts before they ever reach the 



38 TAXATION: THE PEOPLE'S BUSINESS 

Treasury. In order to accomplish this end 
efforts are made to find general words which 
do not speak in terms of appropriations and 
cannot be readily calculated. 

However necessary these practices may 
have been during the war in order to give 
greater freedom of administrative action in 
the use of public funds, they are utterly in- 
defensible in time of peace. By diverting 
funds before they reach the Treasury, Con- 
gress is creating the dangerous precedent of 
allowing Government money to be expended 
without the direct control of Congress or the 
supervision of the Treasury. The disposition 
of vast funds is put into the hands of adminis- 
trative officers of various departments or 
Government agencies, without limitations as 
to their use; and a situation is thus created 
which not only is contrary to the intent of the 
Constitution but is also unscientific and dan- 
gerous in the extreme. 

Throughout the world, the process of defla- 
tion has been retarded by the system of sub- 
sidies prevalent in so many countries. The 



TREASURY POLICIES 39 

war loft in its train many economic hard- 
ships. Many classes of producers suffered 
from lack of demand for their products, while 
the consuming classes were forced to pay ex- 
tortionate prices for articles in which a 
scarcity existed, such as houses, bread and 
coal. Various measures have been taken to 
remedy these conditions. Subsidies have been 
granted to some industries to encourage pro- 
duction until the demand should become nor- 
mal; and bonuses have been granted to re- 
lieve certain classes of consumers burdened 
by the high prices of necessaries. Such ef- 
forts to regulate the law of supply and de- 
mand have generally proved ineffective, and 
in many European countries have resulted 
in expenditures by the state for which no 
adequate income could be found. 

A bonus or subsidy can be paid only by tak- 
ing money out of the pockets of all the people 
in order that it shall find its way back into 
the pockets of some of the people. It ac- 
complishes nothing less than a redistribution 
of the wealth of the country by governmental 



40 TAXATION: THE PEOPLE'S BUSINESS 

operation, and constitutes a bad precedent, 
which is likely to prove more and more ex- 
pensive to the country with each surrender to 
organized pressure. 

It is of the utmost importance that expen- 
ditures should be kept down to the minimum 
requirements of the Government and that the 
Budget should balance, for, in a world of dis- 
ordered governmental finances, the United 
States owes it to itself to keep its house in 
order and balance its Budget as it has done 
in the last five years. 

The aggregate of Government expendi- 
tures subject to modification by executive con- 
trol is comparatively small in amount. Such 
items as payment of the public debt, trust 
fund investments, pensions, appropriations 
for Indians, Customs and Internal Revenue, 
and, for the most part, veterans' relief can- 
not be reduced by the executive departments. 
The attached table (Appendix F), shows the 
large amount of fixed charges which the 
Government must meet each year. 

The diagrams on pages 42, 43 present in 



TREASURY POLICIES 41 

graphic form the percentage distribution of 
receipts and expenditures for the fiscal year 
1923 and may be taken as fairly typical of 
conditions which the Government is facing in 
the next few years. 

The Government's expenditures may be di- 
vided into two classes, as follows: 

Class 1. 

War Department 10.62% 

Navy Department 9.01% 

Sinking Fund and other debt retirements . 10.89% 

Interest on the public debt 28.56% 

Veterans' Bureau 12.49% 

Pensions 7.19% 

Total 78.76% 

Class 2. 

Trust fund investments 95% 

Indians 1.22% 

Refunds 4.17% 

Good roads 2.15% 

Operations in special accounts 1.33% 

All other expenditures 11.42% 

Total 21.24% 

From the above, it will be seen that wars, 
past and future, are responsible for the con- 
sumption of over three-fourths of the public 
revenue. It is time to face the facts and rec- 
ognize that, in spite of the utmost economy 
that can be effected in administration, the 



42 TAXATION: THE PEOPLE'S BUSINESS 



DIAGRAM I 

ORDINARY RECEIPTS OF THE GOVERNMENT 

FISCAL YEAR ENDED JUNE 30,1923 
TOTAL =84,007,135.481. 




TREASURY POLICIES 



43 



DIAGRAM Z 

GOVERNMENT EXPENDITURES CHARGEABLE AGAINST 
ORDINARY RECEIPTS 

FISCA'L YEAR ENDED JUNE 30,1923 
TOTAL = * 3.697. 478.OEO 




REFUNDS 

4 17 % 



PENSIONS 7 19 % 



INTEREST 

ON PUBLIC DEBT 

28 36% 



NAVY 

DEPARTMENT 
901 % 



VETERANS' BUREAU 

12.49% 



WAR 

DEPARTMENT 
10.62.% 



44 TAXATION: THE PEOPLE'S BUSINESS 

cost of government cannot be greatly reduced 
so long as wars continue to recur with their 
aftermath of vastly increased expenditures. 

Class 2 on page 41 shows where reductions 
in expenditures must be made. The Army and 
Navy have already been reduced to the limit 
consistent with national safety. From the 
comparatively small amount devoted to the 
operation of the Government departments, 
only a limited amount can be saved; and if 
any drastic reduction is to be made in ex- 
penditures, the public debt must be paid in 
order to stop the tremendous interest 
charges which are paid each year out of taxes. 

There are two means of debt retirement; 
first, repayments on loans made to foreign 
nations, and second, the operation of the 
Sinking Fund. As regards foreign loans, the 
law authorizes that repayments may be made 
in United States Government bonds and 
notes; and such repayments as have been 
received to date from Great Britain have been 
almost entirely in Liberty Bonds, which are 
accepted at par and accrued interest in pay- 



TREASURY POLICIES 45 

ment of an equal amount of foreign debt. 
The Liberty Bonds received in this way by 
the United States Government are imme- 
diately cancelled and a corresponding reduc- 
tion made both in the foreign debt arid in the 
public debt of the United States. The trans- 
action is merely a paper one and brings no 
revenue into the Treasury. 

It is absolutely necessary that a sound 
policy of debt retirement be followed and that 
repayments of the " foreign loans " be ap- 
plied in reduction of the debt owed by the 
United States to the holders of Liberty 
Bonds. The Victory Liberty Loan Act pro- 
vided for a "Sinking Fund" or annual ap- 
propriation which, added to repayments re- 
ceived from foreign governments, would re- 
tire the public debt within a reasonable 
period. 

The money represented by these loans to 
foreign governments was borrowed in the 
first place by the United States from its own 
citizens, to whom Liberty Bonds and Victory 
Notes were given in exchange. The funds, as 



46 TAXATION: THE PEOPLE'S BUSINESS 

everyone knows, have already been spent by 
the foreign debtor nations in the successful 
prosecution of the war, and, when these funds 
are repaid to this Government, the latter 
must, in honesty to the holders of Liberty 
Bonds, buy up and cancel those bonds; or, 
if repayments are made by foreign govern- 
ments in the form of Liberty Bonds, then 
these securities, which cannot be reissued, 
must be retired and the public debt reduced 
by a corresponding amount. 

In view of the great carrying charge of the 
debt, it would secin imperative that the debt 
be reduced as rapidly as possible and that no 
further obligations be incurred in the form of 
unusual or extraordinary expenditures. In 
so far as this Government is concerned, its 
policy has been to keep its own house in or- 
der, to maintain the gold standard unim- 
paired, to balance its budget and to carry out 
a reasonable program for the orderly fund- 
ing and gradual liquidation of the war debt. 
It is becoming more and more apparent that 
the gradual restoration of business and in- 



TREASURY POLICIES 47 

dustry in Europe will come not only through 
the maintenance of sound financial conditions 
in this country but also in the gradual adop- 
tion of similar principles by the governments 
of Europe, many of which still persist in 
policies of budgetary deficits and currency 
inflation. 



CHAPTER III 
KEVISING THE TAXES 



CHAPTER III 

REVISING THB TAiBS 

A OOEOLLABY of Hamilton's policy of keep- 
ing the Government's expenditures within 
its income is the further policy of keeping 
the revenues not too greatly in excess of ex- 
penditures. It was in accordance with this 
policy that the Treasury in the fall of 1923 
recommended a reduction of the taxes. 

Theories of taxation are more interesting 
and more intelligible when applied to actual 
conditions for, in the conduct of government, 
as every responsible official sooner or later 
finds out, one is more often confronted with 
a condition than with a theory. It will be 
worth while, therefore, to review the recom- 
mendations made by the Treasury in connec- 
tion with conditions existing at the end of 
the fiscal year 1923. 

The fiscal years 1922 and 1923 each closed 

51 



52 TAXATION: THE PEOPLE'S BUSINESS 

with a surplus of about three hundred and 
ten million dollars above all expenditures, 
chargeable against ordinary receipts, includ- 
ing the Sinking Fund and other similar re- 
tirements of the debt. This surplus, of 
course, was not, as many seemed to think, a 
deposit of cash in bank, available for imme- 
diate expenditure. The public debt at the 
close of the fiscal year 1923 was about 
twenty-two billion dollars, and of this amount 
one billion dollars was in short-time certifi- 
cates, having a maturity of less than a year ; 
and four billion dollars was in notes matur- 
ing within four years. On each of the four 
quarterly tax payment dates the Government 
issues its Treasury Certificates to keep sta- 
ble the money market during tax payments 
and to give the Government sufficient funds 
with which to operate until the next payment. 
In other words, at least four times a year the 
Government borrows money and pays it back 
out of tax receipts. An excess, therefore, of 
receipts, over expenditures for any three 
months' period simply results in smaller bor- 



REVISING THE TAXES 53 

rowing for the next period, and does not re- 
sult in an accumulation of cash. It is an 
automatic reduction of the debt. The Gov- 
ernment operates in the same manner as 
does a business man who is heavily in debt 
to the bank. The latter merely renews his 
paper for lesser amounts each ninety days 
as he accumulates funds with which to pay 
off his notes. 

In the case of the Government, therefore, 
every new expenditure must be paid out of 
new borrowings. The Sinking Fund, which 
is part of the Budget of regular govern- 
mental expenditures, reduces the debt by 
about three hundred million dollars a year, 
and the British repayments and other less 
important items bring the amount of debt 
reduction annually to about half a billion 
dollars. These repayments will eliminate 
the debt within a reasonable period ; and the 
Treasury felt that the desirability of fur- 
ther debt reduction out of surplus receipts 
was not so great as a lessening of the tax 
burden. Based upon these premises, what 



54 TAXATION: THE PEOPLE'S BUSINESS 

was known as the Mellon Plan of tax reduc- 
tion was worked out. 

In view not only of the surplus but of the 
heavy and, unscientific tax rates in force at 
the close of the fiscal year 1923, the Treas- 
ury felt that the fortunate condition of the 
finances offered an opportunity not merely 
to reduce the taxes but to revise the system 
in accordance with sound principles of taxa- 
tion. In a letter which I wrote on November 
10, 1923, to Honorable William B. Green, 
Acting Chairman of the Committee on Ways 
and Means of the House of Representatives * 
I recommended that the tax system be re- 
vised substantially as follows: 

(1) By allowing a 25% reduction in the 
tax on earned income; 

(2) By reducing the normal tax rates 
from 4% to 3% and from 8% to 6% ; 

(3) By reducing the surtax rates by com- 
mencing their application at $10,000 instead 
of $6,000, and scaling them progressively 
upwards to 25 % at $100,000; 

1 (See Appendix A.) 



REVISING THE TAXES 



55 



(4) By repealing the telegraph and ad- 
mission taxes and certain small miscellane- 
ous taxes; 

(5) By making certain changes in the reve- 
nue laws in the interest of simplicity and 
clarity, eliminating methods of tax avoid- 
ance and providing a more satisfactory 
method of determining tax liability. 

The provision of widest general interest, 
because it affected everyone, was the pro- 
posed reduction of the normal tax rates. 
The following table shows the saving to tax- 
payers in the lower brackets under the rates 
proposed : 

INCOME TAX PAYABLE UPON CERTAIN EARNED NET INCOMES 





SINGLE PERSON 


HEAD or FAMILY WITH 
DxpxifDxirr CHILDBBN 


NOT INOOM 








Present law 


Proposed 


Present law 


Proposed. 


$1,000 


$0.00 


$0.00 


$0.00 


$0.00 


2,000 


40.00 


22.50 


0.00 


0.00 


3,000 


80.00 


45.00 


0.00 


0.00 


4,000 


120.00 


67.50 


28.00 


15.75 


5,000 


160.00 


90.00 


68.00 


38.25 


6,000 


240.00 


135.00 


128.00 


72.00 


7,000 


380.00 


180.00 


186.00 


99.00 


8,000 


420.00 


225.00 


276.00 


144.00 


9,000 


510.00 


270.00 


366.00 


189.00 


10,000 


600.00 


315.00 


456.00 


234.00 



56 TAXATION: THE PEOPLE'S BUSINESS 

The Treasury actuaries estimated that 
under the proposed rates the Government 
would sustain a loss in revenue and the tax- 
payers a saving of about ninety-two million 
dollars in the brackets under $6,000, and 
fifty-two million dollars in the brackets from 
$6,000 to $10,000, or a total saving of one 
hundred and forty-four million dollars in the 
brackets under $10,000 a year. About 70% 
of the loss in revenue to the Government 
would come from the brackets under $10,000 
and only 2y%% of the loss in revenue would 
come from the brackets of income in excess 
of $100,000 a year. It was estimated that 
even this 2^% l ss would be more than 
made up in the second year of the operation 
of the law. 

The provision of next widest general in- 
terest was the recommendation for a reduc- 
tion of 25% in the tax on earned income as 
compared with that paid upon incomes de- 
rived from business or investments. The 
fairness of taxing more lightly incomes from 
wages, salaries and professional services 



REVISING THE TAXES 57 

than the incomes from business or from in- 
vestments is beyond question. In the first 
case, the income is uncertain and limited in 
duration; sickness or death destroys it and 
old age diminishes it. In the other, the 
source of the income continues; the income 
may be disposed of during a man's life and 
it descends to his heirs. 

Surely we can afford to make a distinction 
between the people whose only capital is 
their mental and physical energy, and the 
people whose income is derived from invest- 
ments. Such a distinction would mean much 
to millions of American workers and would 
be an added inspiration to the man who 
must provide a competence during his few 
productive years to care for himself and his 
family when his earning capacity is at an 
end. 

All income under $5,000 should be con- 
sidered earned income. Under such a con- 
struction, substantial justice would be done 
and the administration of the law would be 
simplified. There is, of course, absolutely 



58 TAXATION: THE PEOPLE'S BUSINESS 

no reason for placing a limitation of $20,000 
or any other sum on earned income. If the 
distinction between unearned income and 
earned income is good, it is good in every 
bracket. One man can earn $20,000 a year 
just as surely as another can earn $5,000. 
If the tax on unearned incomes in excess of 
$20,000 is at the proper rate, then the same 
rate is too high for earned incomes. 

The third outstanding feature of the 
Treasury's recommendations was the pro- 
posal for a revision of the surtaxes. As this 
was practically the only recommendation on 
which a very great division of opinion arose, 
I shall leave it for consideration in a later 
chapter. 

Another recommendation was that the de- 
ductions for capital losses should be limited 
to I2y 2 % of the loss. Capital assets may be 
defined as property held by the taxpayer for 
profit or investment for more than two years. 
The present revenue law limits the tax on 
capital gains to 12% % but puts no limit on 
the deductions for capital losses. I believe 



REVISING THE TAXES 59 

that it would be sounder taxation policy gen- 
erally not to recognize either capital gain 
or capital loss for purposes of income tax. 
This is the policy adopted in practically all 
other countries having income tax laws, but 
it has not been the policy in the United 
States. 

In all probability, more revenue has been 
lost to the Government by permitting the 
deduction of capital losses than has been 
realized by including capital gains as in- 
come. So long, however, as our law recog- 
nizes capital gains and capital losses for 
income tax purposes, gain and loss should 
be placed upon the same basis, and the pro- 
vision of the 1921 Act taxing capital gains 
at I2y 2 % should be extended to capital 
losses, so that the amount by which the tax 
may be reduced on account of capital loss 
will not exceed 12y 2 % of the loss. It is esti- 
mated that such a provision in the law would 
increase the revenues by about twenty-five 
million dollars. 

Deductions from gross income for interest 



60 TAXATION: THE PEOPLE'S BUSINESS 

paid during the year and for losses not of a 
business character should be limited to the 
amount the sum of these items exceeds the 
tax-exempt income of the taxpayer. The 
1921 Act provides that interest on indebted- 
ness to acquire or carry tax-exempt securi- 
ties is not deductible. This provision is in- 
effective because a taxpayer may purchase 
tax-exempt securities for cash and borrow 
money for other purposes. So long as a tax- 
payer has income which is not reached for 
taxation, he should not be permitted to de- 
duct his non-business losses from the income 
which is taxable, but should be restricted in 
the first instance to a deduction of these 
losses on his non-taxable income. The esti- 
mated increase of revenue from this source 
is thirty-five million dollars. 

In some States the income of the husband 
is the joint income of the husband and wife, 
and each, therefore, is permitted to file a re- 
turn for one-half of the income. This gives 
an unfair advantage to the citizens of those 
States over the citizens of the other States 



REVISING THE TAXES 61 

of this country, and, to correct this in- 
equality, it was recommended that the Fed- 
eral Government tax community property 
income to the spouse having control of the 
income. It was estimated that such a pro- 
vision in the law would increase the revenues 
by about eight million dollars. 

A recommendation was also made that the 
tax on telegrams, telephones and leased 
wires should be repealed. This is the last 
remaining of the transportation taxes estab- 
lished during the war. It is a source of in- 
convenience to every person using the tele- 
phone or telegraph, and should now be elimi- 
nated from the tax system. The Treasury 
estimated that the repeal of this tax would 
mean a loss in revenue of about thirty million 
dollars a year. 

Another war tax which should be repealed 
is the tax on admissions. The greater part 
of this revenue is derived from the admis- 
sions charged by neighborhood moving pic- 
ture theatres. The tax is, therefore, paid by 
the great bulk of the people whose main 



62 TAXATION: THE PEOPLE'S BUSINESS 

source &i recreation is attending the movies 
in the neighborhood of their homes. The 
loss in revenue would be about seventy mil- 
lion dollars, but it would constitute a direct 
saving to a large number of people whose 
tax burden should be lightened wherever it is 
possible to do so. 

The Treasury also suggested to Congress 
the possibility of eliminating various small 
miscellaneous taxes which have an inconsid- 
erable bearing on the general revenue of the 
Government and are a source of inconven- 
ience to taxpayers as well as difficult to col- 
lect. These changes are in line with the the- 
ory that taxation should be simplified and 
made effective for bringing in revenue with- 
out constantly annoying and irritating the 
taxpayer. In carrying out this theory, it is 
highly important, of course, that the reve- 
nue laws should be strengthened by elimi- 
nating methods heretofore used by taxpayers 
to avoid payment of taxes. 

Every effort should be made to simplify 
administration of the laws and to permit a 



REVISING THE TAXES 68 

prompt determination of liability in a man- 
ner more satisfactory to the taxpayer. As 
one step toward this end, the Treasury rec- 
ommended the establishment of a Board of 
Tax Appeals in the Treasury but independ- 
ent of the Bureau of Internal Revenue, to 
hear and determine cases involving the as- 
sessment of internal revenue taxes., The 
Board would sit locally in the various ju- 
dicial circuits throughout the country. This 
would give an independent administrative 
tribunal equipped to hear both sides of the 
controversy, which would sit on appeals 
from the Bureau of Internal Revenue and 
make decisions which would be conclusive on 
both the Bureau and the taxpayer on the 
question of assessment. The taxpayer, in 
the event that decision should be against him, 
would have to pay the tax according to the 
assessment and have recourse to the courts, 
while the Government, in case decision 
should be against it, would likewise be 
obliged to have recourse to the courts, in 
order to enforce the collection of the tax. In 



64 TAXATION: THE PEOPLE'S BUSINESS 

a hearing in the courts, the findings of the 
Board should be taken as prima facie evi- 
dence of the facts contained therein. 

In other nations having income tax laws, 
privacy of returns is respected. In every 
State in the United States, with one excep- 
tion, privacy of returns is guaranteed by 
law. That exception is Wisconsin, where 
the privacy provision of the act has been re- 
pealed, but the validity of the law has been 
attacked successfully in the lower courts and 
final decision has not yet been received from 
the Supreme Court. As regards the Federal 
law, it would not be objectionable if the 
privacy of returns be removed so far as cer- 
tain committees of Congress are concerned, 
provided that the returns are submitted to 
the committees only in executive session and 
mention of the returns on the floor of Con- 
gress and the publication thereof in the Con- 
gressional Record be prevented. But there 
can be no privacy if the returns are dis- 
cussed in open committee or on the floor of 
Congress. 



REVISING THE TAXES 65 

It was estimated that the recommenda- 
tions for changes in the tax laws, as stated 
above, would have the following effect on the 
Government's revenues: 

DECREASE INCREASE 
(in millions (in millions 
of dollars) of dollars) 

Reduction of 25% in tax on earned 

income 97 

Reduction in normal tax 92 

Readjustment of surtax rates . . . 102 

Capital loss limited to 12 H% 25 

Interest and capital loss deductions 

limited 36 

Community property amendment . 8 

Repeal of telegraph and telephone 

tax 30 

Repeal of admissions tax 70 .... 

Total 391 68 

68 

Net Loss 323 

The benefits of the reduction will be dis- 
tributed among all classes of taxpayers, and 
the revision generally will help to free busi- 
ness and industry of vexatious interference 
and encourage in all lines a more healthy 
development of productive enterprise. 



CHAPTER IV 

SURTAXES 



CHAPTER IV 

SURTAXES 

THE surtax is the outgrowth of war con- 
ditions. It is based on the theory that the 
man of large income should pay more pro- 
portionately than the smaller taxpayer. If 
A has twice as much income as B, then A 
pays not twice but three or four times as 
much tax. It is a progressively increasing 
tax, which ranges from \% to 50%, begin- 
ning at incomes of $6,000 a year. As an 
example of how the surtax operates, a man 
with an income of $1,000,000 has the same 
aggregate income as 200 men each with in- 
comes of $5,000, but the 200 small incomes 
pay a tax of $38.25 each or an aggregate tax 
of $7,650, whereas the millionaire under the 
Treasury's recommendations will pay a tax 
of $298,792. The one large income pays 40 
times the tax paid by the 200 smaller incomes 

69 



70 TAXATION: THE PEOPLE'S BUSINESS 

of equal aggregate amount, or the same 
amount of tax as 7,800 men with an in- 
come of $5,000 each or a total income of 
$39,000,000. 

In addition to the surtax, of course, the 
same taxpayers pay the normal tax of 4:% 
on the first $4,000 of their incomes and an 
additional 8% on all income in excess of that 
amount, so that the very large incomes are 
taxed as much as 58%. If A, for instance, 
has an income of $6,000, his tax is $240, 
whereas B, with an income of $12,000, is 
taxed $240 on the first $6,000 and $560 on 
the second $6,000, making a total tax of 
$800, or more than three times the tax levied 
on A. 

Under the Treasury's recommendations it 
was proposed that the surtax should be re- 
vised, making the application of the surtax 
begin with incomes of $10,000 instead of 
$6,000, and increasing progressively up- 
wards to 25% on all incomes of $100,000 and 
over. Incomes under $10,000 would pay no 
surtax at all; incomes over $100,000 would 



SURTAXES 71 

pay the maximum of 25%, plus the normal 
tax. 

To the average man, it seems not unfair 
that the taxpayer with an income of over 
$200,000 a year should pay over half of it to 
the Government. It is a well-known fact 
that most people of great wealth use a com- 
paratively small amount of their incomes for 
their own and their families' personal physi- 
cal needs. Taxation, however, is not a 
means of confiscating wealth but of raising 
necessary revenues for the Government. 

One of the foundations of our American 
civilization is equality of opportunity, which 
presupposes the right of each man to enjoy 
the fruits of his labor after contributing his 
fair share to the support of the Government, 
which protects him and his property. But 
that is a very different matter from confis- 
cating a part of his wealth, not because the 
country requires it for the prosecution of a 
war or some other purpose, but because he 
seems to have more money than he needs. 
Our civilization, after all, is based on accum- 



72 TAXATION: THE PEOPLE'S BUSINESS 

ulated capital, and that capital is no less 
vital to our prosperity than is the extraordi- 
nary energy which has built up in this coun- 
try the greatest material civilization the 
world has ever seen. Any policy that delib- 
erately destroys that accumulated capital 
under the spur of no necessity is striking 
directly at the soundness of our financial 
structure and is full of menace for the 
future. 

In time of war or great public necessity, 
unusual tax measures can always be justi- 
fied. During the World War, surtaxes were 
evolved to meet the extraordinary commit- 
ments necessary for the successful prosecu- 
tion of the war. For a time the surtax rates 
produced a large income, but since the close 
of the war, their productivity has steadily 
declined and the man of large income has 
tended more and more to invest his capital 
in such a way that the tax collector cannot 
reach it. 

This is clearly shown by the statistics for 
the six-year period extending from 1916 to 



SURTAXES 73 

1921. The preparation of income statistics 
is a matter of considerable time and labor 
and cannot be done until all returns from 
the collectors can be assembled, examined 
and tabulated. The statistics of 1921 re- 
turns were completed in October, 1923, and 
are the latest figures available. The force 
of these statistics, as may be seen from the 
table on page 74, is most compelling. 

This table contains the total net incomes 
reported from all classes as well as the net 
incomes of those in the $300,000 class. For 
the full six-year period (1916-1921) shown 
in the table, it will be noticed that the total 
net incomes returned for taxation have in- 
creased from $6,298,000,000 to $19,577,000,- 
000, whereas incomes in the $300,000 class 
have decreased from nearly $1,000,000,000 in 
1916 to $153,000,000 in 1921, and the number 
of taxpayers in that class has fallen from 
1,296 to 246. Again referring to the same 
table, it will be noted that dividends and tax- 
able interest on investments have increased 
during the period from $3,200,000,000 to 



74 TAXATION: THE PEOPLE'S BUSINESS 



, 
o 



I 



H 

I 



5 



go e* tH 

CO Oi CO 






COCOOOO5IOIO 

oocoooooo 

O> r-< OO 1O O CO 

"" 



1 rH i I O CO CO 

iCOO^ Tt<*O 

5 t- "# T*< W rH 



CO 
O 






CO 
rt* 



I s * Cvl CO *O C 



CO *< 00 O> O fH 

tH *H rS F-* N W 



SUETAXES 



75 



$4,160,000,000, whereas dividends and taxable 
interest on investments of the $300,000 class 
of taxpayers have decreased from $706,000,- 
000 to $155,000,000. The table further dis- 
closes that whereas the year 1920 shows a 
peak in total net incomes and total dividends 
and taxable interest on investments, it made 
no halt in the progressive diminution in the 
number of taxpayers with incomes in the 
$300,000 class, in their total net incomes, or 
in their incomes from dividends and taxable 
interest on investments. 



YBAB 


TOTAL SUBTAX 


SURTAX ON INCOME 
IN EXCESS ov 
$300,000 


PERCENTAGE OF 
TOTAL OP THOSE 
IN EXCESS OF 
$300,000 


1916 


$121,946,136 


$81,404,194 


66.8 


1917 


433,345,732 


201,937,975 


46.5 


1918 


651,289,027 


220,218,131 


33.8 


1919 


801,525,303 


243,601,410 


30.4 


1920 


596,803,767 


134,709,112 


22.6 


1921 


411,327,684 


84,797,344 


20.6 



1 1016 was a year of low surtax rates. 

The above table shows the amount of 
surtax returned on account of incomes in 
excess of $300,000 for the six-year period, 



76 TAXATION: THE PEOPLE'S BUSINESS 

together with the total surtax returned and 
the percentage the surtax on incomes in ex- 
cess of $300,000 was in relation to the total 
surtax. 

From this it is clearly seen that, whereas 
the total surtax has varied, the percentage 
of surtax paid by the $300,000 class has pro- 
gressively decreased from 66.8 % to 20.6%, 
without a break for any prosperous year. 
We have, therefore, for the six years of 
varying degrees of prosperity, statistics 
showing a marked and continuous tend- 
ency. 

In view of the increase in net income of 
the country from 1916 to 1921, as shown by 
the above statistics, it can hardly be con- 
tended that there were fewer men of large 
wealth in the country in 1916 than in 1921. 
The question is, therefore, where did the 
income of these men go, since it was not re- 
ported for taxation! 

There is no doubt of the fact that much of 
it went into tax-exempt securities. There 
are over $12,000,000,000 of wholly tax-ex- 



SURTAXES 77 

empt securities outstanding, and the loss of 
revenue to the Government over what it 
would receive if the income were taxable is 
estimated at over $200,000,000 a year, and 
the loss of revenue over a similar investment 
in productive business at over $400,000,000 
a year. In the 1921 Eevenue Act the Con- 
gress removed the requirement that tax- 
exempt income be reported. The extent to 
which people of wealth have had resort to 
this means of avoidance is not available to 
the Government except in returns for in- 
heritance tax purposes. 

It has been contended in correspondence 
addressed to me that tax-exempt securities 
are not attractive as compared with bank 
stocks and industrials which yield from 10 
to 100% on their investment. Such a state- 
ment, of course, is misleading if the basis is 
made the amount originally invested. The 
proper basis is the market value of the secur- 
ities. The question is, can a taxpayer get 
more return after income taxes out of $1,000 
worth of tax-exempt securities or out of 



78 TAXATION: THE PEOPLE'S BUSINESS 

$1,000 worth of some taxable investment? I 
know of no sound bank stock which yields 
as high as 10% on what it can be sold for 
and the proceeds put in tax-exempt secur- 
ities, nor do I know any sound investments 
which run up to 100% on the market value 
of the stock. It is true that speculation 
sometimes gives these high returns, but it 
is the very demand for such returns on ac- 
count of the high surtaxes that has kept 
capital out of ordinary productive business 
and attracted it only to such projects as give 
opportunity for undue profit. 

Standard Oil stocks in 1923 have been cited 
as an example of investments which would 
be made in preference to tax-exempt secur- 
ities. This argument is most appropriately 
answered by the return of the estate of Mr. 
William Rockefeller, who was doubtless fa- 
miliar with the possibilities of the Standard 
Oil companies. The total market value of 
his investments in those stocks was less than 
$7,000,000, whereas the value of his wholly 
tax-exempt bonds was over $44,000,000 or six 



SURTAXES 79 

times the amount he held in the four Stand- 
ard Oil companies. 

Many men of great wealth in this country 
have put some or all of their fortunes into 
tax-exempt securities. In tho cases of these 
men, high surtaxes are becoming less and 
less productive of revenue; and in many 
cases they have become barren. It is in- 
credible that a system of taxation which per- 
mits a man with an income of $1,000,000 a 
year to pay not one cent to the support of 
his Government should remain unaltered. 

What is the remedy? It is time to face the 
facts and to recognize that merely levying 
high surtaxes will not halt the flight of cap- 
ital away from taxable investments. Just 
as labor cannot be forced to work against 
its will, so it can be taken for granted that 
capital will not work unless the return is 
worth while. It will continue to retire into 
the shelter of tax-exempt bonds, which offer 
both security and immunity from the tax 
collector. 

Congress has refused, ; r spite of repeated 



80 TAXATION: THE PEOPLE'S BUSINESS 

requests by the Treasury, to submit to the 
States a Constitutional amendment, taking 
away the tax-exempt privilege now enjoyed 
by State, county and municipal bonds. There 
is consequently only one course to pursue. 
It must be made more profitable for wealth 
to go into taxable business than into tax- 
exempt bonds. 

The Treasury has accordingly recom- 
mended that a maximum surtax of 25% plus 
6% normal tax be imposed in lieu of the 58% 
tax now levied on the largest incomes. Such 
a reduction is necessaiy in order to attract 
the large fortunes back into productive 
enterprise. 

The Treasury has been asked how this 
figure was determined. The question is one 
to which ordinary business experience must 
give answer. If a man is manufacturing any 
article of commerce, he will endeavor to fix 
a price for his product at a point which will 
yield a profit and at the same time stimulate 
a demand for what he has to sell. If he puts 
his price too low, his sales are large but his 



SURTAXES 81 

profits small; if he puts his price too high, 
his profit for each article is large but his sales 
fall off, so that his total profit again is low. 
Somewhere between these extremes is the 
price at which he will make the most money. 
An income tax is the price which the Gov- 
ernment charges for the privilege of having 
taxable income. If the price is too low, the 
Government's revenue is not large enough; 
if the price is too high, the taxpayer, through 
the many means available, avoids a taxable 
income and the Government gets less out of 
a high tax than it would out of a lower one. 
What the proper figure is between these ex- 
tremes is not detcrminable with absolute 
accuracy. It is the opinion of some authori- 
ties on taxation that this figure is below 15%. 
None of them places it as high as 25%. 
Clearly, 58% is excessive. For example, an 
investor is offered a prospect of going into a 
business returning 11%. He also has the 
choice of buying a municipal bond paying 
4%% which, to a man of large income, returns 
the same net income as the 11% business. 



82 TAXATION: THE PEOPLE'S BUSINESS 

No business returning 11 % net is as sound as 
a municipal bond. Consequently the investor 
puts his money into tax-exempt securities; 
the Government gets no tax and productive 
business is deprived of the capital. 

Everyone at all active in business is ac- 
quainted with many instances where new 
projects have not been consummated on ac- 
count of high surtaxes. With the proposed 
maximum rate of 6% normal tax plus 25% 
surtax, an investment yielding 6y 2 % would 
be the equivalent of a 4%% tax-exempt bond. 
Businesses with reasonable assurance of 
such a return can be found, with the specu- 
lative probability of greater return. The 
investor, with the chance of making more, 
will go into business and reject the tax- 
exempt security. As a consequence, he will 
have a taxable income in which the Govern- 
ment will share instead of income yielding no 
revenue whatever to the Government. 

An interesting illustration of this is the 
situation in 1916, when, with surtax rates 
running up to 13% as a maximum, the Gov- 



SURTAXES 83 

eminent collected from the $300,000 class 
$81,000,000 in surtaxes. In 1921, with the 
surtax reaching 65%, the Government col- 
lected from the same class of taxpayers 
$84,000,000. In other words, the Government 
received substantially the same revenue from 
high incomes with a 13% surtax as it re- 
ceived with a 65% surtax. It is not too much 
to hope that some day we may get back on a 
tax basis of 10%, the old Hebrew tithe, which 
was always considered a fairly heavy tax. 

The analysis which the Treasury has made 
of the tax situation, as well as the remedy 
which it has proposed, has received the sup- 
port of one of the most eminent authorities 
on taxation in the country. The following ex- 
tract is quoted from an open letter to the 
Chairman of the Committee on Ways and 
Means of the House of Representatives writ- 
ten by Thomas S. Adams, Professor of Eco- 
nomics at Yale University, former President 
of the National Tax Association, formerly a 
member of the Wisconsin State Board of Tax 
Commissioners, and Tax Adviser to the 



84 TAXATION: THE PEOPLE'S BUSINESS 

United States Treasury Department from 
1917 to 1921. After reviewing the question 
of tax avoidance under the present law and 
recognizing the impossibility of immediately 
closing all the holes in the law, by means of 
which tax payment is avoided, he makes the 
following statement with reference to the 
revision of the surtaxes: 

"Assuming that the holes in the income 
tax will not be closed in the near fu- 
ture, what conclusions fairly follow with 
respect to the upper surtaxes? 

"I shall not insult your intelligence by 
asserting that there is a precise maximum 
surtax, definitely known or demonstrable, 
which inevitably * follows as the day the 
night' from the above premise. It is pos- 
sible, for instance, that a few inexperi- 
enced members of Congress may not know 
of the ease with which the income tax may 
be legally avoided, when high rates pro- 
vide a sufficient incentive. Again, there 
may be a few idealistic congressmen who 
so fervently believe that the rich ought to 
pay 40 to 50 per cent of their incomes, 
that they would rather assert this obli- 



SURTAXES 85 

gation in the tax law and not collect the 
tax, than vote for a 25 per cent rate, or 
any other rate which can be collected. 

"But the practical and experienced 
congressman, if I understand his posi- 
tion, does not wish to be placed in these 
groups nor be judged by the standards 
applicable to such groups. He is after 
results and elects to be judged by the ac- 
tual fruits of the legislation which he 
supports. Surely such a congressman, if 
the holes in the tax remain open, and he 
nevertheless votes for surtaxes of 38 or 
40 per cent, cannot go to his constituents 
and conscientiously say : ' I have voted to 
make the rich pay what they ought to pay. ' 
The most that he can fairly say is: 'I 
have voted for the rates which the rich 
ought to pay, and hope within the next 
four or five years to find ways and means 
of closing the holes by which most rich 
men now avoid such rates. * 

"The latter, I gather, is the position of 
those who, knowing that the holes are open, 
nevertheless vote for the rates that make 
the rich utilize these holes. They propose 
'to narrow some of these holes at this ses- 
sion of Congress and close more of them 



86 TAXATION: THE PEOPLE'S BUSINESS 

in the future.' I do not sneer at this po- 
sition. It is one that an honest and intel- 
ligent man could conceivably take. But 
it overlooks and forgets one crucial fact. 
It assumes that, four or five years from 
now, when we get around to the task of 
patching up the holes in the income tax, 
we shall have the kind of income tax that 
can be patched up. The probability is 
strong that in four or five years the in- 
come tax will, as a matter of practical 

politics, be past patching. 

#*### 

"We debate and dispute about the mi- 
nutiae of rates, when the question is the 
honesty or integrity and hence the real 
life of the progressive income tax. 

"The income tax will not be saved by 
lifting from its load a mere straw. Re- 
ducing the maximum surtax from 50 to 44, 
or even to 40 per cent, would in my opin- 
ion be useless. It would be cutting off the 
tail by inches. Taxpayers who will avoid 
50 per cent surtaxes, will avoid 40 per 
cent and, in my deliberate judgment, 35 
per cent surtaxes. There are some occa- 
sions when a half loaf is better than noth- 
ing at all. This is not one of those occa- 



SURTAXES 87 

sions. I can see no justification in prin- 
ciple for a cut in the maximum surtax of 
10 or 12 per cent. There should be greater 
reduction or no reduction at all. The rea- 
son or justification for cutting the upper 
surtaxes is not to reduce the taxes of the 
few rich men who happen to be caught. 
The justification is to get a tax that can 
be enforced; to reduce the discrepancy 
between the taxation of corporations and 
the taxation of individuals; to give back 
to certain lines of business whose normal 
supply of credit comes from wealthy in- 
dividuals, their normal and natural in- 
vestment market; and most of all, to give 
to the income tax at this critical period a 
task which it can creditably perform. 

"When revenue is needed, most Ameri- 
cans (including myself) believe in levying 
the highest progressive rates that can be 
imposed without doing more harm than 
good to the nation as a whole. But at this 
moment, any rate is too high that will 
retard the restoration of the income tax 
to health and working efficiency. Any rate 
is too high that pushes the income tax 
into deeper disrepute. With the holes in 
the income tax wide open, it seems to me 



88 TAXATION: THE PEOPLE'S BUSINESS 

that its friends should be the first to re- 
sent and oppose rates which expose the 
tax to contempt as a complicated night- 
mare of political dreamers. We want an 
effective progressive tax, not a gesture. 

"If the new income tax the income tax 
of 1924 fails to reach and actually tax 
the richer taxpayers, whose fault will it 
be t Who will be responsible for the fur- 
ther degradation of the income tax? 

"We shall not be able to blame the 
rich. They escape, for the most part, by 
legal avoidance, not by illegal evasion. 
Few people, rich or poor, pay taxes which 
they can lawfully avoid. 

"We shall not be able to blame the ad- 
ministration, if the tax law carries rates 
which Secretary Mellon and his Demo- 
cratic predecessors have said it is im- 
possible to collect in times of peace. Sec- 
retary Mellon will have a perfect alibi. 

"But he has stated as his opinion that 
a maximum surtax of 25 per cent will 
reverse the tide of avoidance and permit 
the income tax to be creditably, if not per- 
fectly, administered. Under such circum- 
stances, is it not the wisest thing for those 
who genuinely care for the future welfare 



SURTAXES 89 

of the income tax to take Secretary Mellon 
at his word? Give him the 25 per cent 
maximum which he requests, and then 
hold him and his administration respon- 
sible for results. 

"In the name of political honesty, what 
difference does it make whether the maxi- 
mum tax be 65 per cent, 45 per cent, or 
35 per cent, if such rates will not be col- 
lected in a dwindling minority of cases ? ' ' 



CHAPTEE V 
TAXING ENERGY AND INITIATIVE 



CHAPTER V 
TAXING ENERGY AND INITIATIVE 

IF high surtaxes were becoming merely in- 
effective we might let the system stand until 
the Government should be obliged to seek 
other sources of revenue. But a much more 
serious matter is involved. The flight of 
capital into safe but unproductive forms of 
investment should give us great concern, for 
it indicates that high surtaxes are gradually 
destroying business initiative. 

The existing system of taxation was 
framed to meet war-time conditions. But 
with the passing of those conditions and the 
continuance of the unscientific tax rates, the 
burden is now being borne chiefly by the man 
of initiative attempting to make money un- 
der the usual conditions of business compe- 
tition. These rates bear most heavily on the 
producer, the salaried man and those en- 

93 



94 TAXATION: THE PEOPLE'S BUSINESS 

gaged in trying to make a competence for 
their later, unproductive years. They penal- 
ize principally the middle incomes, while per- 
mitting wealth to escape by investment in 
tax-exempt securities and by other available 
methods. The vital defect in our present sys- 
tem is that the tax burden is borne by wealth 
in the making, not by capital already in ex- 
istence. We place a tax on energy and initia- 
tive; and at the same time provide a refuge 
in the form of tax-exempt securities, into 
which wealth that has been accumulated or in- 
herited can retire and defy the tax collector. 
We have under the high surtaxes a system 
that increases the actual tax burden on the 
men of moderate incomes and allows many of 
the largest incomes to escape taxation. 

Initiative has always been the most valu- 
able American characteristic. It was this 
spirit in the early colonists which brought 
them to America, not to find an easier ex- 
istence, but to enjoy religious and political 
freedom, as well as to better their material 
condition. They faced death by savages and 



TAXING ENERGY AND INITIATIVE 95 

starvation in order to build up a new coun- 
try. It was the same spirit of adventure 
which peopled and developed the West. And 
it is this same spirit extended into business 
that has made America the great and pros- 
perous nation she is today. 

The United States is no mere happy acci- 
dent. What we have has been achieved by 
courage and hard work. The spirit of busi- 
ness adventure has built up in this country a 
civilization which offers unprecedented re- 
wards to any man who is willing to work. 
But where the Government takes away an 
unreasonable share of his earnings, the in- 
centive to work is no longer there and a 
slackening of effort is the result. To share 
not at all in a man's losses and to take one- 
half of his gains, making him work three days 
out of six for the Government, is to impose 
odds too heavy to be borne. More and more 
the business adventure becomes too hazard- 
ous and the high spirit of initiative disap- 
pears in discouragement. An economic sys- 
tem which permits wealth in existence to 



96 TAXATION: THE PEOPLE'S BUSINESS 

escape its share in the expense of the Gov- 
ernment, and wealth in creation to be penal- 
ized until the creative spirit is destroyed, can- 
not be the right system for America. 

Henry Ford is one of the outstanding ex- 
amples of what American initiative has ac- 
complished in the last twenty years. Under 
the conditions which then obtained in this 
country, he has built up one of the great in- 
dustrial establishments of the world, giving 
employment to thousands and adding to the 
comfort of millions of individuals by placing 
within their reach an automobile of moderate 
cost. In a recent interview he told why such 
an accomplishment would have been impos- 
sible under the present high surtaxes. 

Starting out with a small capital, he put 
his profits back into the business and these 
in turn were used to buy better machinery, 
thus making it possible to reduce the price of 
his cars. If the present tax rates had been 
in force, most of these profits would have 
been paid to the Government and Mr. Ford 
doubts that it would have been possible ever 



TAXING ENERGY AND INITIATIVE 97 

to reach a point where he could have pro- 
duced a car under $1500. Mr. Ford added: 

"High taxes on the rich do not take 
burdens off the poor. They put burdens 
on the poor. As far as our company is 
concerned, we can go on about as we now 
are, whether the surtax be 25% or 50%. 
We can make some improvements, but we 
cannot do the great things we should do 
had we more money. We cannot make 
such progress in the next fifteen years as 
we have in the last fifteen, and all other 
forward-looking companies will be in ex- 
actly the same boat." 

Mr. Eichard Olney, formerly a member of 
Congress and now engaged in the wool busi- 
ness in Boston, had the following to say 
about the surtaxes : 

"As a member of a firm of wool mer- 
chants, we have a customer operating 
about ten sets of woolen machinery, who, 
about a year ago, made plans to enlarge 
his plant fully one-half to meet an in- 
creasing demand for manufactured goods, 
but, consulting with his partners, he de- 



98 TAXATION: THE PEOPLE'S BUSINESS 

cided on account of the high surtaxes to 
invest the surplus balance in profits from 
the firm in non-taxable securities. In 
other words, he resented the penalty im- 
posed by the Government upon thrift 
through a severely high surtax and in- 
vested his surplus balance in profits where 
he would receive a fair income involving 
no great risk and anxiety/ 7 

Another interesting bit of testimony in con- 
nection with still another great industry was 
contained in a letter received by the Treas- 
ury from Mr. Daniel Guggenheim. Mr. Gug- 
genheim said : 

"Up to a few years ago our operations 
were upon a progressively increasing 
scale; at the present time they are upon 
a greatly reduced scale, and the reason is 
because of the unduly high surtaxes upon 
incomes. The net result is a great decline 
in our ability to do that which we would 
like to do in the promotion of American 
enterprise, business activity and pros- 
perity. 

"Until recent years it was not uncom- 
mon for us directly through our firm or 



TAXING ENERGY AND INITIATIVE 99 

through corporations created for that pur- 
pose, to spend fully $500,000 each year in 
the mere examination of mining proper- 
ties. Today our expenses in that direc- 
tion are practically nil, and the large or- 
ganization which we had built up, for that 
purpose, has been virtually dissolved. 

4 * Under the present plan of taxation, 
the business man must assume the burden 
of all losses, whereas the Government 
through taxes takes so large a share of 
the profits that in a business such as min- 
ing, involving great risks of loss, the pos- 
sible net return under existing law 
does not warrant taking the chances in- 
volved. 

"If a reduction in the surtaxes is made 
in accordance with your proposals, there 
is no doubt that I will personally be re- 
lieved from certain taxation. But that 
fact will not add to my personal comfort 
or expenditure; it will merely enable me 
to make a further investment in profitable 
enterprise, the profits from which will in 
turn be subject to taxation. A change in 
the plan of taxation, under which those 
who earn substantial profits may retain a 
sufficient share of them to compensate for 



100 TAXATION: THE PEOPLE'S BUSINESS 

possible losses, will very decidedly affect 
the vigor of not alone our own but all 
American business effort. ' 9 

One of the most interesting letters received 
by the Treasury was written to a senator by 
a woman engaged in the dressmaking busi- 
ness. The following extract is quoted from 
the letter: 

' 'This is a woman's endorsement of 
Secretary Mellon 7 s plan for reducing 
Federal taxes, and I want to give you my 
reasons as briefly as possible. 

"For ten years I have been engaged in 
the business of designing, making and 
selling embroidered dresses and dress pat- 
terns. 

"This business gives employment to 
several hundred women in Kentucky and 
in other States. Aside from the executive 
and clerical staff, workers are employed 
as designers, as embroiderers and some as 
canvassers. 

"They are thus enabled to live in their 
own homes largely in the country dis- 
tricts, to develop their special talents in 
congenial and profitable employment, to 



TAXING ENERGY AND INITIATIVE 101 

supplement the family income, and in 
many instances to support and educate 
their families and to lay aside something 
for a rainy day. 

"The success of this business is a vital 
thing for these employes quite as much 
so as for me. Its success depends, of 
course, upon ourselves, but also upon our 
ability to sell our dresses. 

"Ability to sell depends upon ability of 
our customers to buy, and this, in turn, 
upon their chance to reduce expenses and 
effect those small economies by which 
women save in order that they may secure 
for themselves the things that beautify 
and brighten life. 

"Now the object of this letter is simply 
to put our story before you to tell you 
of the great burden upon our business. 
This burden comes, not merely in direct 
taxes, but even more in limiting the pur- 
chasing powers of those who would buy 
from us if they could, but who cannot 
buy if they in turn are stripped by taxa- 
tion. 

* ' Thus industry lags and our own work- 
ers lack employment and hands are idle 
whose deft fingers might make beautiful 



102 TAXATION: THE PEOPLE'S BUSINESS 

things that capable women in turn could 
sell if only customers could buy. 

"I cannot estimate this direct loss of 
business, due to the burdens of taxation, 
nor can I appraise the evils accruing to 
the Government itself from piling up 
taxes that are more than its necessary ex- 
penses. An obvious result is a demand 
for a distribution of such accumulation. 
There will always be classes in the com- 
munity insisting that the Government 
owes them something. Few of them will 
profit by any donation that may be made 
by the Government, which, after all, takes 
from the producing class what it gives in 
so-called bounty. 

"I am a woman. My business associ- 
ates are women. "We have built up our 
business from nothing, without special 
benefits from legislation or taxation. We 
do not want any, but we do want a chance 
to make our own way unhampered by ex- 
cessive tax burdens. 

"For the years 1919, 1920 and 1921, the 
annual burden of Federal taxes upon our 
combined efforts was an average of 42 per 
cent of the net income of our business. 
Our customers felt the pinch of taxation 



TAXING ENEKGY AND INITIATIVE 103 

in the same way, if not to the same 
extent. 

"As a result, in 1922 we had no profits, 
and the government no taxes from our 
business. It is the old story of killing the 
goose that laid golden eggs. 

"I am sure that, if you could see this 
subject through the eyes of women in busi- 
ness, you would realize the absolute neces- 
sity of giving some relief. 9 ' 

These letters give convincing testimony of 
the effect of the high surtaxes upon four im- 
portant, unrelated industries. Similar testi- 
mony could be cited of other trades and in- 
dustries affected in like manner. 

The flow of capital into tax-exempt se- 
curities has been felt particularly in two 
other businesses of great importance to the 
general public. It is estimated that the rail- 
roads will require a billion dollars a year 
of new capital in order satisfactorily to pro- 
vide the facilities and equipment requisite to 
handle the traffic presented and to reduce 
the cost of transportation. In earlier years 



104 TAXATION: THE PEOPLE'S BUSINESS 

the railroads have been able to maintain a 
reasonable proportion between their total 
stock issues and their total interest obliga- 
tions. As illustrative of this, the percent- 
ages of new bond issues to new stock issues 
in the three years 1911, 1912, 1913, were 
respectively 59 per cent, 60 per cent, and 
53 per cent. In the last three years, under 
high surtaxes, these percentages have be- 
come 100 per cent, 95 per cent, and 94 per 
cent. The time is rapidly approaching when 
the railroads will be unable to issue further 
bonds without substantial increase in the 
stock investment. Originally railroad stocks 
have been purchased and held by wealthy 
men and the bonds have more generally gone 
into the hands of the smaller investor. The 
Supreme Court has recently sustained the 
validity of the " recapture clause/' which 
effectually prevents any new stock being sold 
at a price which would give a man with large 
income an adequate return on his investment. 
If the railroads are to be furnished with 
capital, much of it must come from the sale 



TAXING ENERGY AND INITIATIVE 105 

of stock and to permit any sale surtaxes 
must be so reduced as to attract the large 
investor to that type of security. Under the 
present surtaxes a 6% stock nets a man of 
small income 6%. It nets the man of large 
wealth but 3%. The correction of this situa- 
tion obviously lies in a lowering of surtaxes. 
There is still an acute shortage of housing 
facilities in the large cities of this country. 
While it is true that the high cost of ma- 
terial and labor has contributed to this 
shortage, the real reason why capital has 
not been more attracted to this investment 
is the surtaxes. If a flat building could be 
built in 1913 on a $100,000 investment, and 
the investor desired 8 per cent return, his 
rents had to be adjusted so as to give him 
net $8,000. If in 1923 a similar building 
should require $200,000, the investor, to get 
the same return after high surtaxes, would 
need net rents of $38,000. He would prob- 
ably, however, wish to provide against this 
abnormal cost of building by amortizing the 
excess cost and demand net rents of $48,000. 



106 TAXATION: THE PEOPLE'S BUSINESS 

We have either the failure to make invest- 
ment because of the unlikelihood of adequate 
return, or a gouging of the tenants. 

It does not change the situation if the 
building operation is done through a cor- 
poration. The individual investor in the 
corporation is interested in what he receives. 
The interposition of a corporate entity be- 
tween the rents of the tenant and the profits 
to the investor, taking into account the capi- 
tal stock tax of the corporation, means sub- 
stantially the same outgo for taxes to the 
Government. Rents must be even higher 
than in the case of individual investors. 

It would seem necessary to reduce the sur- 
taxes, not only as a means of saving the pro- 
ductivity of the system, but also on account 
of the far-reaching effect which such a reduc- 
tion would have on the country's continued 
development. It is a strange theory of taxa- 
tion which, in order to make the gesture of 
taxing the rich, retains rates that are pro- 
ducing less and less revenue each year and 
at the same time discouraging industry and 



TAXING ENERGY AND INITIATIVE 107 

threatening the country's future prosperity. 
It is true that many existing industries are 
prospering and that the country's condition 
today is sound. But new investments are 
not being made in sufficient number and new 
enterprises are starting out under a disad- 
vantage as compared with old established 
ones. No useful purpose will be served by 
pretending to reduce the surtaxes. In order 
to have any economic effect at all, they must 
be cut far enough to free capital for new 
enterprises. In other words, wo must return 
again to an economically sound basis of 
taxation. 



OHAPTEE VI 

ESTATE TAXES 



CHAPTER VI 
ESTATE TAXES 

A DISPOSITION has been manifested recently 
in Congress to increase inheritance taxes 
from the present maximum of 25% to a 
maximum of 40%. Such legislation would 
be most unwise from every point of view. 

In the first place, the right of the Federal 
Government to tax inheritances is based 
upon no specific Constitutional power, but 
upon the theory of an excise tax. These 
taxes have been used heretofore only to ob- 
tain additional revenue in time of war and 
should be preserved for such use in the 
future. 

They have been levied four times in the 
country's history, and may be known as the 
Revolutionary War Tax, enacted in 1797 
and repealed in 1802; the Civil War Tax, 
enacted in 1862 and repealed in 1870; the 
ill 



112 TAXATION: THE PEOPLE'S BUSINESS 

Spanish War Tax, which remained on the 
statute books from 1898 to 1902; and the 
present Inheritance Tax, which was enacted 
in 1916 and subsequently amended. The 
rates now reach a maximum of 25% in ad- 
dition to the heavy estate taxes imposed by 
the various States in which the decedents' 
property is located. While the States should 
do their share in the reduction of these 
taxes, the Federal tax is very heavy and 
should be lightened, not increased, if the 
ultimate good of the country is to be taken 
into consideration. 

Inheritance taxes are properly sources of 
revenue for the States. They are a mate- 
rial element in a State budget; they are a 
comparatively small element in the Federal 
budget. The whole return which the Fed- 
eral Government receives from estate taxes, 
amounting to about $110,000,000 under pres- 
ent rates, is insignificant in comparison with 
the general receipts of the Government. To 
deprive the States of this source of revenue, 
properly their own, is to compel them to 



ESTATE TAXES 113 

increase taxes and to resort still further to 
their principal source of income, which con- 
sists in levies on land. 

It is difficult to understand the attitude of 
a man who opposes the adoption of a Con- 
stitutional amendment taking away the tax- 
exempt privilege of State and municipal 
securities because he feels it would be an 
invasion of "States rights, " and yet advo- 
cates the permanent levy by the Federal Gov- 
ernment of higher and higher estate taxes, 
which are essentially taxes to be levied by the 
States, rather than the Federal Government. 
In advocating lower estate taxes and a re- 
striction of tax-exempt securities, the Treas- 
ury has been actuated in both cases by a 
desire to save the productivity of the reve- 
nues, which is seriously threatened under the 
existing system of taxation. In the case of 
tax-exempt securities, the States would give 
up no right by the adoption of the amend- 
ment but would merely cease to profit at the 
expense of the Federal Government. In the 
case of estate taxes, on the other hand, the 



114 TAXATION: THE PEOPLE'S BUSINESS 

States have certain definite rights which 
should never be invaded by the Federal 
Government, except in times of great neces- 
sity, as, for instance, in the conduct of wars. 

The character of taxation should not be 
such as to destroy the very source from 
which revenue is to flow. Almost every State 
in the Union has an estate or inheritance 
tax, and every estate pays, therefore, not 
only the Federal tax but the tax of the State 
of the residence of the decedent, plus, under 
the present modern system of investment, 
the taxes of one or more other States. The 
total tax always two taxes and often three 
or four, may take more than half of a large 
estate, and cases are possible where it would 
take practically the entire property. The 
situation here is even worse than in Eng- 
land, where there is but one tax. Here there 
are several. 

The table on page 115 shows at a glance the 
estate, inheritance or legacy taxes imposed 
by the various States in addition to the estate 
taxes imposed by the Federal Government. 



ESTATE TAXES 



115 



STA 



EXEMPTION 



RATES 



Alabama 




None 


Alaska 


$100-110,000 . . . 


1-17| 


Arizona 


100- 10,000 . . . 


1-25 


Arkansas . . . . 


500- 3,000 i. . . 


1-40 


California 


500- 24,000 . . . 


1-20 


Colorado 


0- 20,000 . . . 


0-16 


Connecticut 


500- 10,000 . . . 


1- 8 


Delaware 


0- 3,000 . . . 


1- 8 


District of Columbia .... 




None 


Florida 




None 


Georgia 


0- 5,000 . . . 


1-21 


Hawaii 


500- 5,000 . . . 


0-10 


Idaho 


500- 10,000 2 . . . 


1-15 


Illinois 


100- 20,000 . . . 


2-30 


Indiana 


100- 15,000 . . . 


1-20 


Iowa 


0- 15,000 8 . . . 


0-20 


Kansas 


0- 75,000 . . . 


$ 15 


Kentucky 


500- 10,000 . . . 


1-15 


Louisiana 


500- 5,000 . . . 


0-10 


Maine 


500- 10,000 . . . 


1- 7 


Maryland 


0-whole estate . 


5 


Massachusetts 


1,000- 10,000 . . . 


1-12 


Michigan 


100- 5,000 4 . . . 


1-25 


Minnesota 


100- 10,000 . . . 


1-20 


Mississippi . . . Estate . . 


5,000 . . . 


i 


" Individual bene- 






ficiary 


500- 7,500 . . . 


t-8 


Missouri 


0- 20,000 '. . . 


1-30 


Montana 


0- 17,500 . . . 


1-16 


Nebraska 


0- 10,000 . . . 


1- 6 


Nevada 


0- 20,000 . . . 


1-25 


New Hampshire 


0- 10,000 . . . 


2-10 


New Jersey 


0- 5,000 . . . 


1- 8 


New Mexico 


0- 10,000 . . . 


1- 5 


New York 


0- 5,000 . . . 


1- 8 


North Carolina 


0- 10,000 . . . 


1- 9 


North Dakota 


0- 10,000 . . . 


1-20 


Ohio 


0- 5,000*. . . 


1-10 


Oklahoma 


500- 15,000 . . . 


1-10 


Oregon . . . Estate . . . 


10,000 . . . 


1-10 


" Individual beneficiary 


0- 1,000 . . . 


0-25 


Pennsylvania 


. . . 


2-10 


Philippine Islands 


pesos 0- 3,000 . . . 


1-64 


Porto Rico 


$200- $5,000 . . . 


1-12 



116 TAXATION: THE PEOPLE'S BUSINESS 



STATES 
Rhode Island 



EXEMPTION 
5,000 



RATBS 

% 
1-2* 

i-8 

1-14 
1-20 
1-10 
0-20 
'3- 5 
1- 5 
1-15 
1-40 
2-35 
2-40 
0-10 



Estate . 

Individual 

beneficiary 1,000- 25,000 

South Carolina 200- 10,000 

South Dakota 100- 10,000 

Tennessee 1,000- 10,000 

Texas 500- 25,000 

Utah 10,000 

Vermont 0- 10,000 

Virginia 1,000- 10,000 

Washington 0- 10,000 

West Virginia 0- 15,000 

Wisconsin 100- 15,000 

Wyoming 1,000- 10,000 

1 Plus $5,000 of value of dower or curtesy. 
1 Plus half the community property. 
1 Plus distributive share of surviving spouse. 
4 Plus an exemption of real property. 

Plus marital rights. 

Plus a widow's and children's award. 

As the above table shows, all the States and 
territories, except three, have recourse to 
estate taxes, with the result that estates arc 
taxed not alone by the Federal Government 
but by one or more of the States also. The 
time has arrived when some action to estab- 
lish apportionment of taxing resources and 
co-ordination of their application as between 
the States and the Federal Government is 
vitally necessary. 

When a man dies, his property does not 
often consist of cash or readily marketable 
securities. The estate taxes must be met in 



ESTATE TAXES 117 

cash and not in kind. His executors must 
proceed to realize this cash through sales of 
the decedent's property. The effect of a 
man's death is immediately to give notice to 
all possible purchasers that a forced sale will 
soon take place. This has the effect of drop- 
ping the price at which securities can be sold 
and results in bringing down not only the 
value of such property and securities but 
values everywhere. The ultimate effect of 
this is to bring down the very values upon 
which the tax is levied and ultimately to de- 
stroy the productivity of the tax both to the 
State and to the Federal Government. 

These high rates of tax in their application 
do not show, therefore, the true proportion 
of the estate taken. In its practical effect, a 
40 per cent rate requires for its satisfaction 
50 per cent or more of the normal value of 
the estate; and in cases where an estate is 
burdened with considerable indebtedness, as 
is usual where the decedent was engaged in 
active business, the destructive effect is still 
greater. Even upon investments which are 



118 TAXATION: THE PEOPLE'S BUSINESS 

of the most liquid and marketable character, 
the effect is to an extent the same, since the 
public knows that a sale must take place and 
there is an immediate reaction in quoted mar- 
ket values in anticipation of the liquidation. 
Now values generally are built up and 
maintained by operation of the credit sys- 
tem. To say that a market value of a par- 
ticular stock is $100 per share means only 
that, if some one is willing to buy the stock 
and some one else is willing to sell, a reason- 
able number of shares will change hands un- 
der these conditions at $100 per share. On 
the other hand, if a seller is forced to dispose 
of his stock, he must find a purchaser where 
he can and at a price at which the purchaser 
will buy, which is often much less than its real 
value. Particularly is this true where the 
sales have to be made in large blocks or where 
the company whose stock is offered is not gen- 
erally known to the public. One very wealthy 
man in England has made a fortune almost 
entirely out of taking advantage of this neces- 
sity of executors. 



ESTATE TAXES 119 

If there were but a single instance of such 
forced sales, the effect on the country as a 
whole perhaps would not be material. When 
you consider, however, that death brings into 
the market in every decade a large propor- 
tion of the total wealth of the country, the 
cumulative effect upon prices is very serious. 
The delicate credit structure upon which 
these prices rest is broken down and to that 
extent values which we call wealth disappear. 
They are not transferred; they disintegrate. 
The wealth is gone. No tax can be more il- 
logical than that which is destructive of the 
very values upon which the tax is based. 

There is a point in the application of rate 
of tax beyond which it is impossible to ex- 
tract revenue and carried to this extreme the 
consequences are revolutionary. For in- 
stance, assuming that all inheritances, large 
and small, were taxed at 40 per cent, it 
would then be only two or three generations 
until private ownership of property would 
cease to exist. Since these taxes are used in 
the current operation of the Government, the 



120 TAXATION: THE PEOPLE'S BUSINESS 

result would be not that the Government had 
absorbed the wealth of the country, but that 
the wealth had been spent and none was left. 
Development of the credit structure and in- 
crease in values make the high standard of 
living in this country and the breaking down 
of these values must necessarily reduce this 
standard of living for everyone. A striking 
illustration of this truth is the case of Russia. 
Russia is a country of large natural resources 
and had great wealth. There were compre- 
hensive commercial operations, great indus- 
trial productivity, and financial institutions 
with large resources in all the centers of 
population. The banks held commercial 
paper, mortgages and other instruments of 
credit based on land and varied production. 
The revolutionists contemplated the seizure 
of this property. They could see these values 
indicating the wealth which they thought 
they might take over. What happened? 
When they commenced to make destructive 
tax levies and seize hold of the assets of the 
institutions, values disappeared and almost 



ESTATE TAXES 121 

all wealth with them. No one got it. It 
simply became non-existent, and all that was 
obtained by those who had expected to benefit 
in the acquisition of this wealth was the phys- 
ical gold and jewels, which had no value in 
Eussia but could be exported and sold in 
countries where values had not yet been de- 
stroyed. When these physical things had 
been disposed of, wealth entirely disappeared. 
Any estate tax in that country would be a 
dry source of revenue. 

In degree England shows a similar ten- 
dency. Since it became a nation, in England 
land had represented wealth. By this is not 
meant simply unproductive residences, but 
land with its accompanying tenant popula- 
tion. Under the high death duties, owner- 
ship in land has ceased to have value and 
large estates can now be purchased for less 
than the cost of the improvements. In other 
words, the land itself is rendered valueless 
by the death duties and no longer produces 
revenue. 

The far-reaching economic effect of high 



122 TAXATION: THE PEOPLE'S BUSINESS 

inheritance taxes is not properly understood. 
These taxes arc a levy upon capital. There 
is no requirement in our law, as there is in 
the English law, that the proceeds from es- 
tate taxes shall go into capital improvements 
of the Government. In other words, capital 
is being destroyed for current operating ex- 
penses and the cumulative effect of such de- 
struction cannot fail to be harmful to the 
country. Estate taxes, carried to an excess, 
in no way differ from the methods of the 
revolutionists in Kussia. Yet many respon- 
sible statesmen in this country, for the sake 
of increasing revenues by a comparatively 
small amount, would raise the inheritance 
tax rates and commit this country to a policy 
of confiscation of wealth. 

As regards a tax on gifts, this tax also is a 
tax on capital, the proceeds of which do not 
go into capital and, therefore, work a de- 
struction of the total capital of the country. 
Any annual tax on gifts is susceptible of 
evasion by spreading the gifts over a period 
of years. Such a tax will mean practically 
nothing: bv wav of revenue to the Govern- 



ESTATE TAXES 123 

ment and will be extremely difficult to detect 
and enforce. It has a most peculiar inci- 
dence, unlike any other tax that I know of 
the one who gives pays the tax, and not the 
one who receives. 

In considering a revision of estate taxes, 
there should be eliminated any question of 
levying the tax as a means of punishing 
wealth or as in some way for the social good 
of our civilization. The theory upon which 
this country was founded is equality of op- 
portunity. So long as a man uses his abili- 
ties within the bounds of the moral sense of 
the community, monetary success is not a 
crime, but on the contrary adds to the total 
wealth of the country and to an increase in 
the standard of living as a whole. 

The social necessity for breaking up large 
fortunes in this country does not exist. 
Very wisely our forefathers declined to im- 
plant in this country the principle of primo- 
geniture under which the eldest son alone 
inherited and kept the properties intact. 
Under our American law, it is customary for 
estates to be divided equally among the 



124 TAXATION: THE PEOPLE'S BUSINESS 

children ; and in a few generations any single 
large fortune is split into many moderate 
inheritances. As a usual thing, the continua- 
tion of a single fortune through several gen- 
erations has been proven to be impossible. 
It is an often quoted saying that " there are 
three generations from shirt sleeves to shirt 
sleeves. ' ' 

To recapitulate: the estate tax furnishes 
but a slight portion of the revenues to the 
Federal Government but it supplies a large 
and important part of the State revenues. 
To destroy values from which the States re- 
ceive income is to force them to resort to 
higher taxes on land. The Federal Govern- 
ment should keep estate taxes as a reserve in 
times of national stress. All prior inheri- 
tance taxes have been war taxes; and it is 
only now that it is proposed to destroy this 
reserve in times when revenues from other 
sources are adequate and even in excess of the 
Nation's needs. Such a course of action is 
not only thoroughly unsound but borders on 
economic suicide. 



CHAPTEB VH 
BENEFITS OF TAX REDUCTION 



CHAPTER VII 

BENEFITS OF TAX REDUCTION 

TAX revision should be viewed only from 
the angle of what is best for the country as 
a whole. Taxes affect the entire country and 
there is no reason why their revision should 
ever be made a question of partisan politics. 

The only controversial phase of the ques- 
tion is the revision of the surtaxes and, 
while there may be a difference of opinion 
as between individuals, there can be no par- 
tisan line-up on this question. Every 
Treasury administration, Republican and 
Democratic, for several years back has rec- 
ommended that the surtax rates be reduced. 
In every case, recommendation has been 
based on the fact, which by this time is a 
matter of common knowledge, that the 

127 



128 TAXATION: THE PEOPLE'S BUSINESS 

higher rates of surtax are not productive and 
in many ways actually operate to the preju- 
dice of the revenues by encouraging invest- 
ment in tax-exempt securities, in order to 
avoid the realization of taxable income. Aa 
long ago as 1919, Secretary of the Treasury 
Glass stated in his annual report: 

44 The upmost brackets of the surtax 
have already passed the point of pro- 
ductivity and the only consequence of 
any further increase would be to drive 
possessors of these great incomes more 
and more to place their wealth in the 
billions of dollars of wholly exempt se- 
curities heretofore issued and still being 
issued by States and municipalities, as 
well as those heretofore issued by the 
United States. This process not only 
destroys a source of revenue to the Fed- 
eral Government, but tends to withdraw 
the capital of very rich men from the de- 
velopment of new enterprises and place 
it at the disposal of State and municipal 
governments upon terms so easy to them 
(the cost of exemptions from taxation 
falling more heavily upon the Federal 



BENEFITS OF TAX REDUCTION 129 

Government) as to stimulate wasteful and 
non-productive expenditure by State and 
municipal governments. " 

At the same time President Wilson in his 
Message to Congress stated as follows : 

"The Congress might well consider 
whether the higher rates of income and 
profits taxes can in peace times be effec- 
tively productive of revenue, and whether 
they may not, on the contrary, be de- 
structive of business activity and produc- 
tive of waste and inefficiency. There is 
a point at which in peace times high rates 
of income and profits taxes discourage 
energy, remove the incentive to new en- 
terprise, encourage extravagant expendi- 
tures and produce industrial stagnation 
with consequent unemployment and other 
attendant evils. " 

A year later Secretary of the Treasury 
Houston, in his annual report for the year 
1920, made even more specific recommenda- 
tions about the surtaxes, stating the case in 
the following terms: 



130 TAXATION: THE PEOPLE'S BUSINESS 

" Since the adoption of the heavy war 
surtaxes in the revenue act of 1917, the 
Treasury has repeatedly called attention 
to the fact that these surtaxes are ex- 
cessive; that they have passed the point 
of maximum productivity and are rapidly 
driving the wealthier taxpayers to trans- 
fer their investments into the thousands 
of millions of ta- T -free securities which 
compete so disastrously with the indus- 
trial and railroad securities upon the 
ready purchase of which the development 
of industry and the expansion of foreign 
trade intimately depend. 

"It seems idle to speculate in the ab- 
stract as to whether or not a progressive 
income-tax schedule rising to rates in 
excess of 70 per cent is justifiable. We 
are confronted with a condition, not a 
theory. The fact is that such rates can- 
not be successfully collected. Tax re- 
turns and statistics are demonstrating 
what it should require no statistical evi- 
dence to prove. For the year 1916 net 
income amounting to $992,972,985 was 
included in the returns of taxpayers 
having net income over $300,000 a year. 
This aggregate fell to $731,372,153 for the 



BENEFITS OP TAX REDUCTION 131 

year 1917 and to $392,247,329 for the year 
1918. There is little reason to believe 
that the actual income of the richer tax- 
payers of the country had fallen in that 
interval. It is the taxable income which 
has been reduced and almost certainly 
through investment by the richer tax- 
payers in tax-exempt properties. What- 
ever one may believe, therefore, about the 
abstract propriety of projecting income- 
tax rates to a point above 70 per cent, 
when the taxpayers affected are subject 
also to State and local taxation, the fact 
remains that to retain such rates in the 
tux law is to cling to a shadow while re- 
linquishing the substance. The effective 
way to tax the rich is to adopt rates that 
do not force investment in tax-exempt 
securities/' 

In advocating a revision of the taxes, the 
Treasury has tried to secure a dispassionate 
consideration of the whole subject by those 
men in both parties who are best fitted by 
training and experience to give the country a 
sound tax system. The Under Secretary of 
the Treasury, Mr. Garrard B. Winston, pub- 



132 TAXATION: THE PEOPLE'S BUSINESS 

licly stated the position of the Treasury in 
a speech at Chicago, in which he said : 

" There is no reason why the subject of 
taxation cannot be approached from a 
purely non-partisan viewpoint. The out- 
standing feature of the Mellon plan is 
the Secretary's recommendation for a re- 
duction of the high surtaxes. Similar 
recommendations have been made by the 
last two preceding Secretaries of the 
Treasury, both of whom held their offices 
under a Democratic President. There is 
nothing political in recommending a sound 
basis of taxation. It is simply common 
sense. " 

President Coolidge, in his Lincoln Day ad- 
dress at New York on February 12, 1924 (see 
Appendix E), gave a masterly analysis of 
the tax situation and urged that the existing 
system be revised along the lines recom- 
mended by the Treasury. The President 
said: 

"The first object of taxation is to secure 
revenue. When the taxation of large in- 
comes is approached with that in view, the 



BENEFITS OF TAX REDUCTION 138 

problem is to find a rate which will pro- 
duce the largest returns. Experience does 
not show that the higher rate produces the 
larger revenue. Experience is all in the 
other way. . . . 

"I agree perfectly with those who wish 
to relieve the small taxpayer by getting 
the largest possible contribution from the 
people with large incomes. But if the 
rates on large incomes are so high that 
they disappear, the small taxpayer will 
be left to bear the entire burden. If, on 
the other hand, the rates are placed where 
they will produce the most revenue from 
large incomes, then the small taxpayer 
will be relieved. The experience of the 
Treasury Department and the opinion of 
the best experts place the rate which will 
collect most from the people of great 
wealth, thus giving the largest relief to 
people of moderate wealth, at not over 25 
per cent* 

"A very important social and economic 
question is also involved in high rates. 
That is the result taxation has upon na- 
tional development. Our progress in that 
direction depends upon two factors per- 
sonal ability and surplus income. An ex- 



134 TAXATION: THE PEOPLE'S BUSINESS 

panding prosperity requires that the larg- 
est possible amount of surplus income 
should be invested in productive enter- 
prise under the direction of the best per- 
sonal ability. This will not be done if the 
rewards of such action are very largely 
taken away by taxation. If we had a tax 
whereby on the first working day the Gov- 
ernment took 5 per cent of your wages, on 
the second day 10 per cent, on the third 
day 20 per cent, on the fourth day 30 per 
cent, on the fifth day 50 per cent, and on 
the sixth day 60 per cent, how many of 
you would continue to work on the last 
two days of the week ? It is the same with 
capital. Surplus income will go into tax- 
exempt securities. It will refuse to take 
the risk incidental to embarking in busi- 
ness. This will raise the rate which es- 
tablished business will have to pay for 
new capital, and result in a marked in- 
crease in the cost of living. If new capital 
will not flow into competing enterprise 
the present concerns tend toward monop- 
oly, increasing again the prices which the 
people must pay. . . . 

' 1 Taken altogether, I think it is easy 
enough to see that I wish to include in 



BENEFITS OF TAX REDUCTION 135 

the program a reduction in the high sur- 
tax rates, not that small incomes may be 
required to pay more and large incomes 
he required to pay less, but that more 
revenue may be secured from large in- 
comes and taxes on small incomes may be 
reduced; not because I wish to relieve the 
wealthy, but because I wish to relieve the 
country." 

A sound revision of taxos should aid ma- 
terially in reducing the cost of living. High 
taxes have always meant a high price level, 
for the taxes are paid, in a large measure, 
by consumers all over the countiy and not 
alone by persons actually giving their checks 
to the Government. No thoughtful person 
longer doubts that, irrespective of his income, 
he pays a part of the high surtaxes in the 
general high price level. 

The public should clearly understand what 
is involved in the effort to re-establish in 
this country a sound basis of taxation. The 
question is not whether two or three million 
voters shall save $10 apiece in their direct 
payments of taxes or $15 apiece, but whether, 



136 TAXATION: THE PEOPLE'S BUSINESS 

by the re-establishment of an economically 
sound basis of taxation, the 110,000,000 peo- 
ple in this country shall save much more than 
$10 or $15 apiece in what they pay for the 
necessities of life. 

In addition to insisting upon a reduction of 
the normal rates and a reduction of the rates 
on eanied income, the high surtax rates must 
be reduced to a point where capital is freed 
from the killing effect of these rates upon 
new investments. In many discussions of the 
tax question the present tax rates, aggregat- 
ing a maximum of 58%, are treated as if 
they were normal rates of taxation. Any re- 
duction from them, it is argued, is a great 
concession to the rich. This is not true. Be- 
fore the war required the taking of every 
cent which could be obtained for the support 
of the Government in its emergency, a surtax 
rate reaching 13% on a two million dollar 
income was considered high. As was pointed 
out in a previous chapter, it is interesting to 
note that substantially as much revenue was 
realized from incomes over $300,000 under 



BENEFITS OF TAX REDUCTION 137 



a 13% maximum in 1916 as was realized 
from the same class of taxpayers under a 
65% rate in 1921. These high surtax rates 
are war taxes ; and, as the war is over, such 
taxation should cease. To retain such rates 
as part of our permanent tax system is to 
keep up, in part, the high costs of living which 
everyone pays. 

The adoption of a sound system of taxa- 
tion will have a favorable effect in many di- 
rections. It should help to solve the housing 
problem, to make possible lower freight and 
passenger rates by getting the railroads back 
on an efficiency basis, to increase savings due 
to the reduction of taxes on earned incomes 
and the lower brackets and thereby to in- 
crease the buying power of the earning class 
and to raise its standard of living. It will 
also promote industrial and business activity 
by diverting into productive enterprise funds 
which are now going into tax-exempt securi- 
ties. This should increase the number of 
jobs and at the same time advance general 
prosperity. 



138 TAXATION: THE PEOPLE'S BUSINESS 

The fortunate condition of the Govern- 
ment's finances in 1924 justifies not only a 
revision but a reduction of taxes. It is pos- 
sible to visualize the effect which such a re- 
duction will have when it is realized that a 
reduction of three hundred million dollars a 
year over a twenty-year period will leave in 
the pockets of the people over six billion 
dollars for other purposes. 

During this time, the budget will provide 
for continued payments which will gradually 
reduce the public debt, so that, if a sound sys- 
tem of taxation is adopted and the present 
policy of economy in government is con- 
tinued, the country may look forward during 
the present generation not only to a decrease 
in the tax burden but to increased prosperity 
in which everyone will share. The prosperity 
of each individual is, after all, dependent 
upon the prosperity of the whole country; 
and anything that endangers or retards the 
country's normal development also jeopard- 
izes to that extent the prosperity of each in- 
dividual taxpayer. 



CHAPTEE VIII 
TAX-EXEMPT SECUEITIES 



CHAPTER VIII 
TAX-EXEMPT SECURITIES 

IN a letter dated April 30, 1921, to the 
Chairman of the Committee on Ways and 
Means of the House of Representatives, I 
said: 

"I suggest for the consideration of 
Congress that it may also be advisable to 
take action by statute or by Constitutional 
amendment, where necessary, to restrict 
further issues of tax-exempt securities. 
It is now the policy of the Federal Gov- 
ernment not to issue its own obligations 
with exemptions from Federal surtaxes 
and profits taxes, but States and munici- 
palities are issuing fully tax-exempt se- 
curities in great volume. It is estimated 
that there are outstanding, perhaps, ten 
billion dollars of fully tax-exempt secur- 
ities. The existence of this mass of 
exempt securities constitutes an economic 

141 



142 TAXATION: THE PEOPLE'S BUSINESS 

evil of the first magnitude. The continued 
issue of tax-exempt securities encourages 
the growth of public indebtedness and 
tends to divert capital from productive 
enterprise. Even though the exemptions 
of outstanding securities cannot be dis- 
turbed, it is important that future issues 
be controlled or prohibited by mutual 
consent of the State and Federal Govern- 
ments." 

Subsequently, the following resolution was 
introduced in the House of Representatives : 

(H. J. Res. 314, 67th Congress, 
4th Session) 

JOINT RESOLUTION Proposing an amend- 
ment to the Constitution of the United 
States. 

Resolved by the Senate and House of 
Representatives of the United States of 
America in Congress assembled (two- 
thirds of each House concurring therein), 
That the following article is proposed as 
an amendment to the Constitution of the 
United States, which shall be valid to all 
intents and purposes as part of the Con- 



TAX-EXEMPT SECURITIES 143 

stitution when ratified by the legislatures 
of three-fourths of the several States : 

"Article . 

"Section 1. The United States shall 
have power to lay and collect taxes on 
income derived from securities issued, 
after the ratification of this article, by 
or under the authority of any State, but 
without discrimination against income de- 
rived from such securities and in favor 
of income derived from securities issued, 
after the ratification of this article, by or 
under the authority of the United States 
or any other State. 

"Sec. 2. Each State shall have power 
to lay and collect taxes on income derived 
by its residents from securities issued, 
after the ratification of this article, by or 
under the authority of the United States ; 
but without discrimination against in- 
come derived from such securities and in 
favor of income derived from securities 
issued, after the ratification of this article, 
by or under the authority of such State. " 

This resolution passed the House of Rep- 
resentatives on January 23, 1923, but failed 



144 TAXATION: THE PEOPLE'S BUSINESS 

of passage in the Senate. It was reintro- 
duced in identical words in the succeeding 
Congress as II. J. Ees. 136, 68th Congress, 
1st Session ; and on February 8, 1924, failed 
to pass the House of Representatives, thus 
bringing to a close, for the present, the 
effort to restrict by Constitutional amend- 
ment further issues of tax-exempt securi- 
ties. 

The situation with regard to tax-exempt 
securities presents a serious problem to the 
country. The Treasury has estimated that 
the amount of such securities outstanding on 
February 29, 1924, was $12,521,000,000 (see 
Appendix C). These securities would 
be unaffected even by a Constitutional 
amendment, so that there is no immediate 
remedy for the situation within the power 
of Congress except the readjustment of the 
surtaxes on a basis that will permit capital 
to seek productive employment and keep it 
from exhausting itself in tax-exempt secur- 
ities. 

Various measures have been proposed, 



TAX-EXEMPT SECURITIES 145 

both in and out of Congress, for meeting the 
situation. One proposal was that, instead 
of passing an amendment to the Constitu- 
tion permitting taxation by the Federal Gov- 
ernment of income from State securities sub- 
sequently issued and giving reciprocal rights 
to the States, a bill should be passed by Con- 
gress taxing the income on State and munici- 
pal securities now existing and requiring that 
the statute be not held void without the con- 
currence of at least all but one of the 
Supreme Court Justices, and that it shall 
continue in full force and effect irrespective 
of the decision of any inferior court. 

The general consensus of opinion is that 
such a bill would be clearly unconstitutional. 
A digest of the decisions and arguments af- 
fecting the question of whether Congress has 
the power to levy a tax upon the income from 
securities issued by the States or political 
subdivisions thereto was made and is set 
forth in a letter dated January 4, 1924, from 
Mr. A. W. Gregg, of the Treasury, to the 
Chairman of the Committee on Ways and 



146 TAXATION: THE PEOPLE'S BUSINESS 

Means of the House of Representatives (see 
Appendix D). 

The measure proposed would apply only 
to municipal and State securities and would 
not apply to securities created by Congress. 
Such discrimination would be indefensible, 
for it would permit the United States to tax 
securities issued by a State or its subdivi- 
sions but would not allow the State to tax 
securities issued by the Federal Government. 

The proposed Constitutional amendment 
(H. J. Res. 136), on the other hand, would 
be reciprocal ; that is, both State and United 
States securities thereafter issued would be 
taxable. Furthermore, the proposed Con- 
stitutional amendment would cover only se- 
curities issued subsequently to its adoption 
and would not affect existing securities in 
the hands of innocent holders. 

Tax exemption was a material factor in 
fixing the price at which these securities 
were sold to their present owners. As an 
example of what this means, the First Lib- 
erty 31/2*8 are fully tax-exempt; the 4^4's of 



TAX-EXEMPT SECURITIES 147 

the same issue and maturity are exempt as 
to normal tax only. Based upon the average 
market price of these bonds during Decem- 
ber, 1923, the removal of the exemption from 
surtax would drop the price from 99.7% to 
87.2%, or a loss of $125 for a $1,000 bond; 
and removal of the normal tax exemption 
would reduce the price further to 82.4%, or 
a total loss of $173 on each $1,000 bond. A 
similar situation would, of course, exist in 
every municipal and State bond. This is the 
value of tax exemption sold and paid for. It 
is proposed to confiscate this value and to 
pay nothing for it. Irrespective of its valid- 
ity, such legislation would seem to be dis- 
honest. 

The legal case for the measure proposed 
is based on what some Justices of the 
Supreme Court may have said in their dis- 
senting opinions, so that there is a grave 
Constitutional question involved and the 
probability of the act being declared uncon- 
stitutional greatly exceeds the probability of 
its constitutionality. The question can only 



148 TAXATION: THE PEOPLE'S BUSINESS 

be decided by an opinion of the United States 
Supreme Court on a case duly brought before 
it. If such a measure as that proposed were 
passed by Congress, it would affect income 
received by taxpayers in the current year, 
which is returnable for taxation in the year 
following. Some time later a decision would 
be obtained from the Supreme Court. In 
the meantime, the doubt of the law's validity 
would completely destroy the market for all 
State and municipal bonds, because the in- 
vestor would be unwilling to purchase bonds 
at a price justified by their tax-exempt fea- 
ture, and the States and the municipalities 
would be charged with negligence if they sold 
their bonds on the basis of not being tax- 
exempt. 

It will be recalled that a similar situation 
arose a few years ago when there was no 
market for Federal Farm Loan Bonds for 
several years until the Supreme Court passed 
upon the constitutionality of the tax-exempt 
feature. This condition of uncertainty would 
exist irrespective of what might ultimately 



TAX-EXEMPT SECURITIES 149 

be the decision. If eventually the Supreme 
Court should determine that the act was 
unconstitutional, then nothing would have 
been accomplished by the measure proposed 
and it would be necessary to start over with 
a Constitutional amendment. At that time 
the Government would have to refund enor- 
mous sums of money which it had collected 
on the tax-exempt income and was wrong- 
fully withholding from the owners, together 
with interest on these sums. The effect on 
the Government's budget in making repay- 
ment of the amounts, which it would then 
have spent and which it had no right to col- 
lect or hold, would be most serious. 

To summarize, first, such a measure as 
that proposed makes an indefensible dis- 
crimination between securities issued by 
States and municipalities and securities 
issued under authority of Congress ; second, 
it confiscates, without compensation, prop- 
erty values which have been paid for by the 
investor; third, it would seriously disturb 
the State and Federal Government finances; 



150 TAXATION: THE PEOPLE'S BUSINESS 

and finally the entire proceeding would most 
probably be vain and the time utterly wasted. 
It would seem far better to abandon projects 
of the kind described, which are unsound, 
unfair, and in all probability vain, and to 
redouble efforts in favor of a Constitutional 
amendment affecting further issues of tax- 
exempt securities and also to effect a reduc- 
tion of the surtaxes affecting, through eco- 
nomic incentive, the tax-exempt securities at 
present outstanding. 

Another contention which has been ad- 
vanced is that, so long as there are high sur- 
taxes, there ought to bo tax-exempt securities 
to provide relief from those surtaxes. There 
is no question of the fact that to sanction 
the continued issuance of securities carrying 
full exemptions from taxation and at the 
same time to attempt to levy Federal income 
surtaxes running as high as 58%, when com- 
bined with the normal tax, creates an impos- 
sible situation, since the tax exemptions of 
the securities will tend to defeat the collec- 
tion of the taxes. The Treasury has accord- 



TAX-EXEMPT SECURITIES 151 

ingly urged that action be taken, first, to 
restrict further issues of tax-exempt secur- 
ities, in order to block this avenue of escape 
from the surtaxes, and second, to reduce 
the surtax rates to a reasonable level, with 
a maximum of 25%, amounting to 31% when 
combined with the normal tax. This would 
provide a workable system and in the long 
run produce more revenue than the present 
rates. 

The high surtaxes date from the Revenue 
Act of 1917, and until that time tax-exempt 
securities presented a problem of but small 
magnitude since most taxes were levied at 
level rates and it could generally be said that 
the loss of taxes was roughly made up by the 
saving in interest costs. With taxes at flat 
rates the exemption is worth about as much 
to one taxpayer as another; and, barring 
any questions as to conflicting State and Fed- 
eral jurisdiction, it could be said with some 
force that, if the State or Federal Govern- 
ments were to tax the securities which they 
themselves issued, purchasers of the secur- 



152 TAXATION: THE PEOPLE'S BUSINESS 

ities would insist on an interest yield high 
enough to compensate for the taxes levied. 
The Federal surtaxes have changed all this 
and created an entirely different problem. 
The exemption to which the greatest impor- 
tance now attaches is the exemption from 
Federal surtaxes and the value of this ex- 
emption depends entirely upon the income of 
the individual taxpayer. Generally speak- 
ing, it will be greatest in the case of the 
wealthiest taxpayer, while to the person pay- 
ing only a normal tax or a low surtax the 
exemption will be relatively of little value. 
This makes it quite impossible, as a practical 
matter, for the borrowing State or Federal 
Government to obtain full value for the ex- 
emption carried by the securities, for in the 
nature of things the securities will be sold 
in the open market at quoted prices adjusted 
to market conditions, though to one pur- 
chaser the exemption may be worth little or 
nothing and to another purchaser, who pays 
the same price, the exemption may be worth 
the equivalent of 10 or 11% on a taxable 
security. 



TAX-EXEMPT SECURITIES 153 

Another fundamental difference is that the 
surtaxes are levied by the Federal Govern- 
ment while the tax-exempt securities are, for 
the most part, issued by the State and munici- 
pal Governments. In other words the Fed- 
eral Government gets no compensating 
advantages whatever from any reduction in 
interest rates that may accrue to the State 
or municipal Government through the tax- 
exempt privilege, so that the tax exemption 
from Federal surtaxes is in fact an involun- 
tary subsidy conferred upon State and 
municipal Governments by the Federal Gov- 
ernment at the expense of its own revenues. 
It does not meet this objection to say that, 
whether the State or Federal Governments 
are involved, it is all one body of taxpayers. 
While this is undoubtedly a valid argument 
in support of uniformity of treatment as be- 
tween the State and Federal Governments, 
it cannot be advanced in support of a system 
which permits taxpayers to avoid their taxes 
to the Federal Government by purchasing 
securities issued by or under authority of 
the States. 



154 TAXATION: THE PEOPLE'S BUSINESS 

The facts are that the Federal Government, 
under the power granted by the 16th amend- 
ment to the Constitution of the United States, 
now levies income taxes on individual in- 
comes, and is imposing graduated additional 
income taxes, commonly known as surtaxes, 
on the higher incomes. At the same time 
the States and municipalities are issuing a 
growing volume of tax-exempt securities, the 
income from which is wholly exempt from 
these very surtaxes, while the Federal Gov- 
ernment, though under our present Consti- 
tutional system it could itself issue fully tax- 
exempt securities, has for some years past 
consistently refrained from issuing such se- 
curities in order to protect the public rev- 
enues. The Federal Government might 
change this policy, and by issuing its own 
securities with full tax exemptions cancel 
much of the artificial value of State and mu- 
nicipal securities, but this would merely swell 
the volume of tax-exempt issues and still 
further endanger the revenues. 

It must be clear that graduated additional 



TAX-EXEMPT SECURITIES 155 

income taxes cannot be effective when there 
exist side by side with them practically un- 
limited quantities of fully tax-exempt securi- 
ties available to defeat them, and that either 
some way must be found to stop the con- 
tinued issuance of tax-exempt securities or 
the Federal Government must find some sub- 
stitute for the surtaxes. The issue is imme- 
diate and serious, for the yield of the surtaxes 
has already been reduced to a relatively small 
sum as compared with the early years, and 
the persistence of the present system is dis- 
torting our whole economic structure and 
hampering the development of business and 
industry throughout the country. A Consti- 
tutional amendment along the lines proposed 
in H. J. Ees. 136 would correct the situation 
and would put State and Federal Govern- 
ments on an exact equality. 

Whatever opposition there is to the pro- 
posed amendment to restrict further issues 
of tax-exempt securities rests upon a misun- 
derstanding of the object and effect of the 
amendment, and this, in turn, harks back to 



156 TAXATION: THE PEOPLE'S BUSINESS 

the old controversies about States' rights and 
the powers of the Federal Government. 
Separated from these old prejudices and 
taken from the point of view of the facts as we 
have to face them today, the proposed Con- 
stitutional amendment involves no question 
whatever of States' rights and makes no at- 
tack whatever on the credit or borrowing 
power of the States or their political subdi- 
visions. The amendment would apply with 
absolute equality to the Federal Government, 
on the one hand, and the States and their po- 
litical subdivisions on the other, and the in- 
terests of the general welfare would put 
exactly the same restrictions upon future 
borrowings by the Federal Government as 
upon future borrowings by the States and 
their political subdivisions. The constantly 
growing mass of tax-exempt securities threat- 
ens the public revenues, not only of the Fed- 
eral Government, but of the States as well, 
and it is reaching such proportions as to 
undermine the development of business and 
industry. 



TAX-EXEMPT SECURITIES 157 

The Federal Government, for the most 
part, has refused to have recourse to tax- 
exempt issues in financing its own operations, 
but the volume of tax-exempt securities of 
the States and their political subdivisions, 
and of other agencies, already outstanding 
and currently issued is so large that the value 
of the exemption to the borrower issuing the 
securities has become relatively insignificant. 
Even now the States and their political sub- 
divisions, notwithstanding the full tax exemp- 
tions on their securities, are obliged to pay 
substantially the same rates on their tax- 
exempt borrowings as the Federal Govern- 
ment pays on securities without exemption 
from Federal income surtaxes. The facts are 
that under our system of graduated Federal 
income surtaxes the issue of tax-exempt 
securities, while of constantly diminishing ad- 
vantage to the borrowing State, or city, pro- 
vides a perfect refuge for wealthy investors, 
being most valuable to the wealthiest tax- 
payer. The actuarial figures show that to 
taxpayers paying surtaxes in the highest 



158 TAXATION: THE PEOPLE'S BUSINESS 

brackets securities subject to Federal income 
surtaxes would have to yield about 12 per cent 
in order to be as attractive as a 5 per cent 
tax-exempt security. For this great advan- 
tage the State which issues the securities gets 
but very little compensating return, and cer- 
tainly no greater return from the wealthiest 
investor than from the smallest investor (to 
whom the exemption is relatively worthless), 
while the United States, which imposes the 
surtaxes, loses its revenue without any com- 
pensating advantage whatever. It is the 
graduated surtax, of course, that gives the 
greatest value to the tax exemption; and 
viewed from this aspect the tax exemption, in 
substance, constitutes a subsidy from the 
Federal Government, the cost of which in the 
long run must fall on those taxpayers who do 
not or cannot take refuge in tax-exempt se- 
curities. 

Even from the point of view of the States 
themselves, it is clear that the continued is- 
suance of tax-exempt securities saves noth- 
ing to the taxpayers in the States and that in 



TAX-EXEMPT SECURITIES 159 

the long run it brings heavier taxes. The 
tax-exempt privilege, with the facility that 
it gives to borrowing, leads in many cases to 
unnecessary or wasteful public expenditure, 
and this in turn is bringing about a menacing 
increase in the debts of States and cities. 
These debts constitute a constantly growing 
charge upon the taxpayers in the several 
States, and will ultimately have to be paid, 
principal and interest, through tax levies 
upon these very taxpayers. It is easy to over- 
look this when the debts are incurred, but it 
is none the less impossible to escape the facts 
when the time comes for payment. It is also 
necessary to bear in mind that in the long 
run all of these public debts, whether the 
debts of States and their political subdivi- 
sions or of the Federal Government itself, 
as well as the taxes which must be imposed 
to meet them, fall upon but one body of tax- 
payers, and that the apparent advantage of 
borrowing by States and cities at the expense 
of the Federal revenues is illusory, since any 
temporary advantages thus obtained will 



160 TAXATION: THE PEOPLE'S BUSINESS 

have to be paid for by the Federal Govern- 
ment at the expense ultimately of the great 
body of taxpayers. This is particularly true 
of tax-exempt securities, for their effect is to 
provide a refuge from taxation for certain 
classes of taxpayers, with correspondingly 
higher taxes on all the rest in order to make 
up the resulting deficiency in the revenues. 
Once it is understood no one can raise any 
valid objection to the proposed Constitutional 
amendment restricting further issues of tax- 
exempt securities. As a matter of fact, it is 
almost grotesque to permit the present 
anomalous situation to continue, for as things 
now stand we have on the one hand a system 
of highly graduated Federal income surtaxes 
and on the other a constantly growing vol- 
ume of securities issued by States and cities 
which are fully exempt from these surtaxes, 
so that taxpayers have only to buy tax-ex- 
empt securities to make the surtaxes ineffec- 
tive. The only way to correct this condition 
is by Constitutional amendment, accom- 
panied by a reduction in the rates. 



TAX-EXEMPT SECURITIES 161 

H. J. Ees. 136 expressly provides in Sec- 
tion 1 that Federal taxes on income derived 
from securities, issued after the ratification 
of the article, by or under the authority of 
any State, must be without discrimination 
against income derived from such securities 
and in favor of income derived from securi- 
ties issued after the ratification of the article 
by or under the authority of the United 
States or any other State. The same pro- 
tection for the Federal Government is ac- 
corded by the second Section, conferring 
power on the States to lay and collect taxes 
on income derived from securities issued 
after the ratification of the article by or un- 
der the authority of the United States. Un- 
der Section 1 as it stands it would be impos- 
sible for the Federal Government to impose 
an income tax on income from future issues 
of State or municipal bonds without imposing 
the same tax on income derived from future 
issues of its own bonds; and as a practical 
matter it is almost inconceivable that Con- 
gress would be willing to impose such a tax 



162 TAXATION: THE PEOPLE'S BUSINESS 

upon the income from both State and Federal 
securities and at the same time exempt from 
the tax income derived from securities issued 
by private corporations. Such a course would 
be repugnant to every Constitutional prin- 
ciple. 

Entirely apart from the practical impos- 
sibility of such a situation, however, it is 
clear that the Constitutional amendment 
(H. J. Res. 136) would prohibit discrimina- 
tion against the bonds of a State and in 
favor of a railroad or industrial corporation. 
All corporations in this country are organ- 
ized under either State or Federal law and 
derive their powers, including the power to 
borrow money, from charters issued by the 
State or Federal Governments as the case 
may be. Securities issued by private cor- 
porations, therefore, may be said to be issued 
"under the authority of " the United States, 
in the case of a Federal corporation, or the 
State of incorporation, in the case of a State 
corporation. Section 1 of the Constitutional 
amendment expressly prohibits discrimina- 



TAX-EXEMPT SECURITIES 163 

tion in favor of securities issued after rati- 
fication of the article under the authority of 
the United States or any other State. This 
in terms would prevent discrimination in 
favor of any bonds issued by a railroad or 
industrial corporation incorporated under 
the laws of the United States or of any other 
State, and likewise, by a corporation organ- 
ized under the laws of the State concerned, 
for it would be Constitutionally impossible 
for the Federal Government to single out 
corporations of one State in the granting of 
tax exemptions. If there were any danger 
here, however, it could readily be corrected 
by striking out in the last line of Section 1 
the word " other. " 

Even after the adoption of the proposed 
Constitutional amendment, neither the 
United States nor any State would have 
power to tax securities of the other already 
issued and outstanding; and under generally 
accepted Constitutional principles, which 
have been affirmed by the Supreme Court, the 
Federal Government cannot levy income 



164 TAXATION: THE PEOPLE'S BUSINESS 

taxes upon the salaries of State or munici- 
pal officers, nor can the States levy income 
taxes upon the salaries of Federal officers. 
To forbid discrimination in favor of these 
non-taxable sources of income would, in ef- 
fect, make the Constitutional amendment in- 
operative. There are also other generally 
recognized distinctions, as, for example, 
between earned and unearned income, and 
miscellaneous special exemptions. These 
difficulties would embarrass the State Gov- 
ernments, in proceeding under the Constitu- 
tional amendment, quite as much as they 
would the Federal Government, and would 
make it impossible for the States to levy any 
income tax upon future issues of Federal 
securities without at the same time imposing 
an income tax on all outstanding issues of 
their own securities, and, in fact, a general 
income tax upon all sources of income sub- 
ject to State taxation. Even if it could be 
Constitutionally done, to levy income taxes 
upon securities already issued as tax-exempt 
would constitute a gross breach of faith, 



TAX-EXEMPT SECURITIES 165 

while to require a general and uniform in- 
come tax, with exactly the same taxation of 
income from securities as of all other sources 
of income, would involve almost insuper- 
able practical difficulties and probably prove 
impossible. 

The Constitutional amendment, as drawn 
in H. J. Res. 136, puts the Federal Govern- 
ment and the States on absolutely the same 
basis, and the very fact that the Federal 
Government is ready and willing, for the 
sake of the general welfare, to place itself 
under these restrictions as to future issues of 
tax-exempt securities, notwithstanding its 
own heavy debt and the practical certainty 
that it will always have obligations outstand- 
ing and to be financed, gives the best possible 
assurance that the States and their political 
subdivisions can place themselves under like 
restrictions without endangering their 
credit or embarrassing their necessary 
borrowings. 

In proposing a Constitutional amendment, 
the Federal Government is not asking from 



166 TAXATION: THE PEOPLE'S BUSINESS 

the States any more than it is willing to yield 
for itself. Tax exemption acquires quite a 
disproportionate value when taxes are not 
at a level rate but are levied at graduated 
rates; and the Federal surtaxes are almost 
wholly responsible for the extraordinary 
value which tax-exempt securities enjoy to- 
day. It is nonsense to refer to this value as 
something which the States have the right 
to enjoy in selling their securities, for the 
value depends in large measure on the rela- 
tive scarcity of tax-exempt securities and the 
Federal Government could seriously impair, 
and nearly destroy, it by issuing all its own 
securities exempt from surtaxes. Contrari- 
wise, since the value of the exemption turns 
largely on the existence of graduated sur- 
taxes, the Federal Government could cer- 
tainly reduce and probably destroy the pres- 
ent premium on tax-exempt securities by 
changing its own tax system and substitut- 
ing for the income surtaxes some other form 
of tax which would not be affected by the 
presence of tax-exempt securities, as, for 



TAX-EXEMPT SECURITIES 167 

example, a tax on sales or expenditures. It 
may, in fact, be driven to some such change 
by force of necessity if the present situation 
continues and enough of the States cling to 
the privilege of issuing securities that give 
rich investors the power, at the expense of 
the rest of the community, to escape from 
the common burdens of taxation. 

The Treasury has strongly recommended 
that the surtaxes be reduced to a maximum 
of 25 per cent; that is to say, a maximum 
combined normal and surtax of 31 per cent. 
It believes that a revision of the surtaxes on 
substantially this basis is fundamentally 
necessary if our present internal revenue 
system is to be successfully administered. A 
revision to substantially the basis recom- 
mended by the Treasury would correct to 
some extent the evil of tax-exempt securi- 
ties, since it would reduce the pressure to es- 
cape taxable income, but the evil would none 
the less remain and would still be serious, 
at least so long as there were any material 
graduation of surtax rates. For example, 



168 TAXATION: THE PEOPLE'S BUSINESS 

even with a maximum surtax of 25 per cent 
there would still be a material inducement 
for large investors to reduce taxable income, 
and to an investor paying surtaxes at the 
rate of 25 per cent a fully tax-exempt se- 
curity would offer substantial advantages as 
compared with a surtaxable security, while 
the tax-exempt security would, of course, be 
far more valuable to such an investor than 
to a small investor. Lower surtaxes, in other 
words, would mitigate the evil but would not 
go to the heart of the situation, for tax 
exemptions would still persist and tend to 
defeat any taxes levied at the revised rates. 
The Federal Government is issuing each 
year substantial amounts of new securities 
and for many years to come will be issuing 
new securities every year, probably in 
amounts larger than the aggregate of State 
and municipal issues during the year, in 
order to refund its obligations previously 
issued. Between now and the end of 1928, 
for example, about $8,000,000,000 of bonds, 
notes and certificates issued by the Federal 



TAX-EXEMPT SECURITIES 169 

Government will mature and in large meas- 
ure these maturing obligations will have to 
be refunded. Any of these refunding obli- 
gations issued after the ratification of the 
Constitutional amendment would be subject 
to its provisions in the same manner as State 
or municipal obligations issued after its 
ratification. The same would be true of 
other refunding obligations issued by the 
Federal Government in succeeding years. 
To show how completely false is the argu- 
ment referred to above, it is enough to call 
attention to the fact that the whole war debt 
of the Federal Government actually matures 
within the next thirty years, with substantial 
maturities falling at frequent intervals. 
These maturing obligations will either be re- 
deemed, in which event the tax exemptions 
they now carry will cease to be of any impor- 
tance, or will be refunded into other obliga- 
tions; and these refunding obligations, if 
issued after the ratification of the Constitu- 
tional amendment, will be subject to its 
provisions. 



170 TAXATION: THE PEOPLE'S BUSINESS 

Nothing can serve to obscure the main 
facts in the situation upon which the Treas- 
ury relies in urging support for the proposed 
Constitutional amendment, namely, that the 
continued issuance of tax-exempt securities 
is building up a constantly growing mass of 
privately held property exempt from all tax- 
ation; that tax exemption in a democracy 
such as ours is repugnant to every Constitu- 
tional principle, since it tends to create a 
class in the community which cannot be 
reached for tax purposes and necessarily in- 
creases the burden of taxation on property 
and incomes that remain taxable ; and that it 
is absolutely inconsistent with any system of 
graduated income surtaxes to provide at the 
same time securities which are fully exempt 
from all taxation, since the exemptions will 
sooner or later defeat at least all the higher 
graduations and will always be worth far 
more to the wealthier taxpayers than to the 
small ones. 

The argument has been advanced that the 
reduction in the high surtax rate will have 



TAX-EXEMPT SECURITIES 171 

no effect upon business, because the most it 
will mean is simply a shifting of investments, 
and some one must purchase the tax-exempt 
securities if they are sold. Before the im- 
position of the high surtaxes, municipal and 
State bonds had a wide market. They were 
well regarded by the investor and found 
their way into trust funds and into the strong 
boxes of the conservative investors no longer 
in active business. Men of initiative and 
activity did not acquire these securities. 
Their wealth, therefore, was left free to be 
devoted to productive business. Under high 
surtax rates, tax-exempt securities, without 
risk, afforded a greater net return than pro- 
ductive business with risk could provide, 
and men with the capacity to produce found 
it more remunerative to produce nothing. 
High surtaxes are no more than a bonus at 
the expense of the Federal Government to 
the State and municipal borrower, giving a 
wholly artificial value to tax exemption. This 
both encourages the municipalities to ex- 
travagance and brings into existence in this 



172 TAXATION: THE PEOPLE'S BUSINESS 

country a large mass of wealth that cannot 
be reached for the support of the Govern- 
ment. A removal of the artificial value of 
tax exemption will restore all securities to 
natural conditions. True, State and munici- 
pal extravagance will be curtailed, but their 
bonds will sell on their merits to the same 
class of investors who heretofore favored 
them. The men capable of business success 
will get out of their dead investments and 
put their brains and money to work. 

We come back, in the end, to the original 
argument, that high surtaxes are becoming 
less and less productive of revenue to the 
Government and at the same time are injur- 
ing business initiative. All business involves 
risk. If business loses, the Government 
shares not at all in the loss ; if business suc- 
ceeds, the Government takes more than half 
the gain. What can long withstand these 
odds ? Capital does not care to take risks on 
these terms. The spirit of initiative may 
still be there, but the present high surtaxes 
are driving it into idleness. America will 



TAX-EXEMPT SECURITIES 173 

become a nation of followers, not leaders. 
There is no escape from the conclusion that a 
tax system having this inevitable result 
must be changed. 



APPENDIX A 

LETTER FROM THE SECRETARY OF THE TREASURY 

TO THE ACTING CHAIRMAN OF THE 

COMMITTEE ON WAYS AND MEANS 

TREASURY DEPARTMENT, 

OFFICE OF THE SECRETARY, 
Washington, November 10, 1923. 

DEAR MR. GREEN : 

In accordance with the request which you 
made shortly after the adjournment of Con- 
gress, the Treasury has been engaged for the 
past few months in considering the possi- 
bilities of tax revision and in developing rec- 
ommendations for the simplification of the 
law. The situation has developed more fa- 
vorably than was anticipated, and I am now 
presenting to you a comprehensive program 
to which I hope the Committee on Ways and 
Means will be able to give consideration at 
the outset of the legislative session. 

The fiscal years 1922 and 1923 have each 
closed with a surplus of about $310,000,000 

176 



176 TAXATION: THE PEOPLE'S BUSINESS 

over and above all expenditures chargeable 
against ordinary receipts, including the sink- 
ing fund and other similar retirements of tbe 
debt. This has been possible only through 
the utmost cooperation between the Execu- 
tive and Congress, as well as among the ex- 
ecutive departments and establishments, all 
of whom have united in a sincere effort to 
reduce the expenditures of the Government. 
At the same time there has been a substantial 
amount of realization upon securities and 
other assets remaining over from the war, 
and the Treasury has succeeded in collecting 
customs and internal revenue taxes in 
amounts somewhat exceeding original expec- 
tations. The result is that the Government 
of the United States is firmly established on 
'ic basis of having balanced its budget each 
year since the cessation of hostilities, with a 
reasonable surplus each year after providing 
for fixed debt charges like the sinking fund, 
and stands squarely committed to the policy 
of including these fixed charges on account of 
the public debt in its ordinary budget each 
year, thus assuring an orderly reduction of 
the war debt out of current revenues. 

What has been done during the two years 
since the establishment of the budget system 



APPENDIX A 177 

shows clearly what united effort can accom- 
plish, and gives every reason for hope that 
the task to which the Administration has set 
itself for this fiscal year can be successfully 
performed, namely, the reduction of the ordi- 
nary expenditures of the Government to a 
total of not more than $3,500,000,000, of which 
about $500,000,000 will be fixed charges on 
account of the sinking fund and other retire- 
ments of the debt. To do this means reduc- 
tions of about $170,000,000 in the estimates of 
expenditures submitted by the spending 
departments and establishments and the exer- 
cise of continued pressure all along the line 
for the utmost economy and efficiency in the 
operations of the Government. 

Having these tilings in mind, the Treasury 
has been canvassing the estimates for the 
present fiscal year and for the succeeding 
fiscal years with a view to determining on the 
one hand what further reductions in expendi- 
ture it would be safe to count on in developing 
a tax-revision program, and on the other 
hand what receipts might reasonably be ex- 
pected on the basis of existing law, assuming 
that no changes were to be made in internal 
taxes. In doing this it has had to keep in 
mind that under present conditions receipts 



178 TAXATION: THE PEOPLE'S BUSINESS 

from customs are abnormally high and that 
surplus war supplies have now been for the 
most part liquidated, leaving relatively little 
to expect on this account in the years to come. 
It has also had to keep in mind that many of 
the internal revenue taxes, as, for example, 
the higher brackets of the surtax, are so 
rapidly becoming unproductive that it is un- 
safe to assume that even with no changes in 
the law the revenues from internal taxes 
would be maintained. After taking into ac- 
count all these considerations, and making 
the most conservative estimates about the 
yield of existing taxes and the possibilities 
of further reductions in expenditure, it ap- 
pears that for this year, and for the next four 
or five years, there should be a surplus of 
something over $300,000,000 a year over and 
above all expenditures chargeable to the ordi- 
nary budget, including the fixed debt charges 
payable out of current revenues. This gives 
a reasonable margin not merely for tax re- 
vision but also for tax reduction. 

On this basis the Treasury has the follow- 
ing recommendations to make : 

1. Make a 25 per cent reduction in the tax 
on earned income. The fairness of taxing 
more lightly income from wages, salaries and 



APPENDIX A 179 

professional services than the income from a 
business or from investment is beyond ques- 
tion. In the first case, the income is uncertain 
and limited in duration ; sickness or death de- 
stroys it and old age diminishes it. In the 
other, the source of the income continues ; it 
may be disposed of during a man's life and 
it descends to his heirs. It is estimated that 
this amendment will mean a loss in revenue of 
about $97,500,000 a year, the greater part of 
which falls in the lower income brackets. 

2. Where the present normal tax is 4 per 
cent reduce it to 3 per cent, and where the 
present normal tax is 8 per cent reduce it to 
6 per cent. This affects all personal incomes 
and the loss of revenue comes largely from 
the lower brackets. It is estimated that thirf 
will mean a loss in revenue of $91,600,000 a 
year. 

3. Reduce the surtax rates by commencing 
their application at $10,000 instead of $6,000, 
and scaling them progressively upwards to 
25 per cent at $100,000. This will readjust 
the surtax rates all along the line, and the 
Treasury recommends the readjustment not 
in order to reduce the revenues but as a 
means of saving the productivity of the sur- 
taxes. In the long run it will mean higher 



180 TAXATION: THE PEOPLE'S BUSINESS 

rather than lower revenues from the surtaxes. 
At the outset it may involve a temporary loss 
in revenue, but the Government Actuary esti- 
mates that even during the first year, if the 
revision is made early enough, the net loss in 
revenue from all the changes in the surtaxes 
would be only about $100,000,000, and that in 
all probability the revenue from the reduced 
rates will soon equal or exceed what would 
accrue at the present rates, because of the 
encouragement which the changes will give to 
productive business. 

The readjustment of the surtaxes, more- 
over, is not in any sense a partisan measure. 
It has been recommended, on substantially 
this basis, by every Secretary of the Treasury 
since the end of the war, irrespective of party. 
The present system is a failure. It was an 
emergency measure, adopted under the pres- 
sure of war necessity and not to be counted 
upon as a permanent part of our revenue 
structure. For a short period the surtaxes 
yielded much revenue, but their productivity 
has been constantly shrinking and the Treas- 
ury's experience shows that the high rates 
now in effect are progressively becoming less 
productive of revenue. See Table II, hereto 
attached. The high rates put pressure on tax- 



APPENDIX A 181 

payers to reduce their taxable income, tend to 
destroy individual initiative and enterprise, 
and seriously impede the development of pro- 
ductive business. Taxpayers subject to the 
higher rates can not afford, for example, to 
invest in American railroads or industries or 
embark upon new enterprises in the face of 
taxes that will tako 50 per cent or more of 
any return that may be realized. These tax- 
payers are withdrawing their capital from 
productive business and investing it instead 
in tax-exempt securities and adopting other 
lawful methods of avoiding the realization of 
taxable income. The result is to stop busi- 
ness transactions that would normally go 
through, and to discourage men of wealth 
from taking the risks which are incidental to 
the development of new business. Ways will 
always be found to avoid taxes so destructive 
in their nature, and the only way to save the 
situation is to put the taxes on a reasonable 
basis that will permit business to go on and 
industry to develop. This, I believe, the read- 
justment herein recommended will accom- 
plish, and it will not only produce larger reve- 
nues but at the same time establish industry 
and trade on a healthier basis throughout the 
country. The alternative is a gradual break- 



182 TAXATION: THE PEOPLE'S BUSINESS 

down in the system, and a perversion of in- 
dustry that stifles our progress as a nation. 

The growth of tax-exempt securities, which 
has resulted directly from the high rates of 
surtax, is at the same time encouraging ex- 
travagance and reckless expenditure on the 
part of local authorities. These State and 
local securities will ultimately have to be 
paid, principal and interest, out of taxes, thus 
contributing directly to the heavy local taxa- 
tion which bears so hard on the farmers and 
small property owners. There is no iftime- 
diate remedy for this within the power of 
Congress except the readjustment of the sur- 
taxes on a basis that will permit capital to 
seek productive employment and keep it from 
exhausting itself in tax-exempt securities. 
The productive use of capital in our railroads 
and industries will also tend to bring lower 
costs for transportation and manufactured 
products, thus helping to relieve the farmer 
from the maladjustment from which he now 
suffers. 

4. Limit the deduction of capital losses to 
12 Va P er cen t f ^e loss. The present reve- 
nue law limits the tax on capital gains to 
12% per cent but puts no limit on the capital 
losses. It is believed it would be sounder 



APPENDIX A 183 

taxation policy generally not to recognize 
either capital gain or capital loss for pur- 
poses of income tax. This is the policy 
adopted in practically all other countries 
having income tax laws, but it has not been 
the policy in the United States. In all prob- 
ability, more revenue has been lost to the 
Government by permitting the deduction of 
capital losses than has been realized by in- 
cluding capital gains as income. So long, 
however, as our law recognizes capital gains 
and capital losses for income tax purposes, 
gain and loss should be placed upon the same 
basis, and the provision of the 1 921 Act tax- 
ing capital gains at 121^ per cent should be 
extended to capital losses, so that the amount 
by which the tax may be reduced by the capi- 
tal loss will not exceed 12 V^ per cent of the 
loss. It is estimated that this will increase 
the revenues by about $25,000,000. 

5. Limit the deductions from gross income 
for interest paid during the year and for 
losses not of a business character to the 
amount the sum of these items exceeds tax- 
exempt income of the taxpayer. The 1921 
Act provides that interest on indebtedness to 
acquire or carry tax-exempt securities is not 
deductible. This provision is ineffective be- 



184 TAXATION: THE PEOPLE'S BUSINESS 

cause a taxpayer may purchase tax-exempt 
securities for cash and borrow money for 
other purposes. It is felt also that so long 
as a taxpayer has income which is not reached 
for taxation, he should not be permitted to 
deduct his non-business losses from the in- 
come which is taxable, but should be re- 
stricted in the first instance to a deduction 
of these losses from his non-taxable income. 
The estimated increase of revenue from this 
source is $35,000,000. 

6. Tax community property income to the 
spouse having control of the income. In 
some States the income of the husband is a 
joint income of the husband and wife, and 
each, therefore, is permitted to file a return 
for one-half of the income. This gives an 
unfair advantage to the citizens of those 
States over the citizens of the other States 
of this country, and this amendment seeks 
to restore the equality. It is estimated that 
it will increase revenues by $8,000,000. 

So much for the income tax recommenda- 
tions, which should become effective January 
1, 1924. In order that you may have before 
you a clear view of the effect of these recom- 
mendations as applied to incomes in the vari- 
ous brackets, I am attaching a table, prepared 



APPENDIX A 



185 



by the Government Actuary, showing the es- 
timated results of the proposed changes in 
the calendar year 1925, on the basis of the 
taxable year 1924. The schedule shows a 
loss of revenue of about $92,000,000 in the 
brackets under $6,000, and a further loss of 
revenue of about $52,000,000 in the next 
bracket of $6,000 to $10,000. In short, about 
70 per cent of the reduction would be in the 
brackets of $10,000 or less, and less than 5 
per cent would fall in the brackets over 
$100,000. 

To show the effect of the proposed changes 
on the income of a typical salaried taxpayer, 
married and having two children, I call your 
attention to the following comparative 
figures : 

Saving 



Income 
$4,000 
5,000 
6,000 
7,000 
8,000 
9,000 
10,000 


Present tax 
$28.00 
68.00 
128.00 
186.00 
276.00 
366.00 
456.00 


Proposed tax 
$15.75 
38.25 
72.00 
99.00 
144.00 
189.00 
234.00 


to taxpayer 
$12.25 
29.75 
56.00 
87.00 
132.00 
177.00 
222.00 



7. Repeal the tax on telegrams, telephones 
and leased wires. This is the last of the 
transportation taxes established during the 
war, is a source of inconvenience to every 
person using the telephone or telegraph, and 



186 TAXATION: THE PEOPLE'S BUSINESS 

should now be eliminated from the tax sys- 
tem. This would mean a loss in revenue of 
about $30,000,000 a year. 

8. Repeal the tax on admissions. The 
greater part of this revenue is derived from 
the admissions charged by neighborhood 
moving picture theatres. The tax is, there- 
fore, paid by the great bulk of the people 
whose main source of recreation is attending 
the movies in the neighborhood of their 
homes. This would mean a loss in revenue of 
about $70,000,000. 

9. Miscellaneous nuisance taxes. Your 
Committee may wish to consider the elimi- 
nation of various small miscellaneous taxes 
which have an inconsiderable bearing on the 
general revenue of the Government, but 
which are a source of inconvenience to tax- 
payers and difficult to collect; and possibly 
there are some articles of jewelry which ac- 
cording to our standard of living cannot 
properly be denominated luxuries, such as, 
for instance, ordinary table silver or watches, 
which you may wish to exempt from the gen- 
eral tax on jewelry. There is not enough 
margin of revenue available to permit the 
repeal of the special taxes which are proving 
productive, but the law could be revised to 



APPENDIX A 187 

good advantage and some of the nuisance 
taxes repealed without material loss of 
revenue. 

10. In addition to the specific recommen- 
dations which directly affect Government 
revenues, there should be amendments to 
strengthen the Act and eliminate methods 
heretofore used by taxpayers to avoid im- 
position of the tax. The exact amount of 
additional revenue to the Government which 
will be brought in by these amendments can- 
not be estimated, but certainly the amend- 
ments will reach much income that heretofore 
has escaped taxation. 

11. Establish a Board of Tax Appeals in 
the Treasury but independent of the Bureau 
of Internal Revenue, to hear and determine 
cases involving the assessment of internal 
revenue taxes. This will give an indepen- 
dent administrative tribunal equipped to 
bear both sides of the controversy, which will 
sit on appeal from the Bureau of Internal 
Revenue and whose decision will be conclu- 
sive on both the Bureau and the taxpayer on 
the question of assessment. The taxpayer, 
in the event that decision is against him, will 
have to pay the tax according to the assess- 
ment and have recourse to the courts, while 



188 TAXATION: THE PEOPLE'S BUSINESS 

the Government, in case decision should be 
against it, will likewise have to have recourse 
to the courts, in order to enforce collection 
of the tax. 

12. Changes should be made in the present 
law to simplify administration, make the law 
more easily understood, and permit a prompt 
determination of liability in a manner more 
satisfactory to the taxpayer. 

In order that you may see the effect on 
Government revenues of the above recom- 
mendations, I submit the following figures 
as to the estimated result of these changes : 

Decrease Increase 
(in mil- (in mil- 
lions of lions of 
dollars) dollars) 

Reduction of 25% in tax on earned income 97 

Reduction in normal tax 92 

Readjustment of surtax rates 102 

Capital loss limited to \2 l /2% 25 

Interest and capital loss deductions limited . . 35 

Community property amendment 8 

Repeal of telegraph and telephone tax 30 

Repeal of admissions tax 70 

TOTAL 391 68 

68 

NET Loss 323 

The benefits of the reduction will be dis- 
tributed among all classes of taxpayers, and 
the revision generally will help to free busi- 
ness and industry of vexatious interference 



APPENDIX A 189 

and encourage in all lines a more healthy 
development of productive enterprise. 

The present burden of taxation is heavy. 
The revenues of the Government are suffi- 
cient to justify substantial reductions and 
the people of the country should receive the 
benefits. No program, however, is feasible 
if the Government is to be committed to new 
and extraordinary expenditures. The rec- 
ommendations for tax reduction set forth in 
this letter are only possible if the Govern- 
ment keeps within the program of expendi- 
ture which the Bureau of the Budget has 
laid down at the direction of the President. 
New or enlarged expenditures would quickly 
eat up the margin of revenue which now ap- 
pears to be available for reducing the burden 
of taxation, and to embark on any soldiers' 
bonus such as was considered in the last Con- 
gress or any other program calling for simi- 
larly large expenditure would make it neces- 
sary to drop all consideration of tax reduc- 
tion and consider instead ways and means 
for providing additional revenue. A sol- 
diers' bonus would postpone tax reduction 
not for one but for many years to come. It 
would mean an increase rather than a de- 
crease in taxes, for in the long run it could 



190 TAXATION: THE PEOPLE'S BUSINESS 

be paid only out of moneys collected by the 
Government from the people in the form of 
taxes. Throughout its consideration of the 
problem the Treasury has proceeded on the 
theory that the country would prefer a sub- 
stantial reduction of taxation to the in- 
creased taxes that would necessarily follow 
from a soldiers' bonus, and I have faith to 
believe that it is justified in that understand- 
ing. Certainly there is nothing better calcu- 
lated to promote the well-being and happi- 
ness of the whole country than a measure 
that will lift, in some degree, the burden of 
taxation that now weighs so heavily on all. 
Very truly yours, 

A. W. MELLON, 
Secretary of the Treasury. 
Hon. WILLIAM R. GREEN, 

Acting Chairman, Committee on Ways 

and Means, 

House of Representatives, 
Washington, D. G. 



APPENDIX A 



191 



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192 TAXATION: THE PEOPLE'S BUSINESS 

This table shows the estimated gain or loss 
in revenue over that estimated under the 
present law, due to the proposed changes in 
the Revenue Act of 1921, and allows for the 
estimated increase in incomes by reason of 
the readjustment of taxes. 

The figures opposite each income tax 
bracket cover the total estimated receipts 
within that bracket. 



APPENDIX A 



193 



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APPENDIX B 



INCOME TAX ON EARNED INCOMES FROM $1,200 TO $6,000 





1 




SINGLE PERSON 


MAKRIKD PERSON WITFI Two 
DEPENDENT CHILDREN 


NET 














Present law 


Proposed 


Present law 


Proposed 


$1,200 


$8 


$4.50 






1,400 


16 


9.00 


. . 




1,600 


24 


13.50 






1,800 


32 


18.00 






2,000 


40 


22.50 






2,200 


48 


27.00 






2,400 


56 


31.50 






2,600 


64 


36.00 






2,800 


72 


40.50 






3,000 


80 


45.00 






3,200 


88 


49.50 






3,400 


96 


54.00 


$4 


$2'.25 


3,600 


104 


58.50 


12 


6.75 


3,800 


112 


63.00 


20 


11.25 


4,000 


120 


67.50 


28 


15.75 


4,200 


128 


72.00 


36 


20.25 


4,400 


136 


76.50 


44 


24.75 


4,600 


144 


81.00 


52 


29.25 


4,800 


152 


85.50 


60 


33.75 


5,000 


160 


90.00 


68 


38.25 


6,200 


176 


99.00 


96 


54.00 


5,400 


192 


108.00 


104 


58.50 


5,600 


208 


117.00 


112 


63.00 


5,800 


224 


126.00 


120 


67.50 


6,000 


240 


135.00 


128 


72.00 



194 



APPENDIX B 



195 



INCOME TAX ON EARNED INCOMES FROM $1,200 TO $6,000 



NET 
INCOME 


SINGLE PEKSON 


MARRIED PERSON WITHOUT 
DEPENDENT CHILDREN 


Present law 


Proposed 


Present law 


Proposed 


$1,200 


$8 


$4.50 






1,400 


16 


9.00 


m 




1,600 


24 


13.50 






1,800 


32 


18.00 


. . 




2,000 


40 


22.50 







2,200 


48 


27.00 


. . 




2,400 


56 


31.50 






2,600 


64 


36.00 


$4 


$2*.25 


2,800 


72 


40.50 


12 


6.75 


3,000 


80 


45.00 


20 


11.25 


3,200 


88 


49.50 


28 


15.75 


3,400 


96 


54.00 


36 


20.25 


3,600 


104 


58.50 


44 


24.75 


3,800 


112 


63.00 


52 


29.25 


4,000 


120 


67.50 


60 


33.75 


4,200 


128 


72.00 


68 


38.25 


4,400 


136 


76.50 


76 


42.75 


4,600 


144 


81 .00 


84 


47.25 


4,800 


152 


85.50 


92 


51.75 


5,000 


160 


90.00 


100 


56.25 


5,200 


176 


99.00 


128 


72.00 


5,400 


192 


108.00 


136 


76.50 


5,600 


208 


117.00 


144 


81.00 


5,800 


224 


126.00 


152 


85.50 


6,000 


240 


135.00 


160 


90.00 



196 TAXATION: THE PEOPLE'S BUSINESS 
INCOME TAX PAYABLE UPON CERTAIN EARNED NET INCOMES 



NET 
INCOME 


SINGLE PERSON 


HEAD OF FAMILY WITH Two 
DEPENDENT CHILDREN 


Present law 


Proposed 


Present law 


Proposed 


$1,000 


$0.00 


$0.00 


$0.00 


$0.00 


2,000 


40.00 


22.50 


0.00 


0.00 


3,000 


80.00 


45.00 


0.00 


0.00 


4,000 


120.00 


67.50 


28.00 


15.75 


5,000 


160.00 


90.00 


68.00 


38.25 


6,000 


240.00 


135.00 


128.00 


72.00 


7,000 


330.00 


180.00 


186.00 


99.00 


8,000 


420.00 


22500 


276.00 


144.00 


9,000 


510.00 


270.00 


366.00 


189.00 


10,000 


600.00 


315.00 


456.00 


234.00 


11,000 


700.00 


367.50 


556.00 


286.50 


12,000 


800.00 


420.00 


656.00 


339.00 


13,000 


910.00 


480.00 


766.00 


399.00 


14,000 


1,020.00 


540.00 


876.00 


459.00 


15,000 


1,140.00 


607.50 


996.00 


526.50 


16,000 


1,260.00 


675.00 


1,116.00 


591.00 


17,000 


1,390.00 


750.00 


1,246.00 


669.00 


18,000 


1,520.00 


825.00 


1,376.00 


744.00 


19,000 


1,660.00 


907.50 


1,516.00 


826.50 


20,000 


1,800.00 


990.00 


1,656.00 


909.00 


21,000 


1,960.00 


1,080 00 


1,816.00 


999.00 


22,000 


2,120.00 


1,170.00 


1,976.00 


1,089.00 


23,000 


2,290.00 


1,267.50 


2,146.00 


1,186.50 


24,000 


2,460.00 


1,365.00 


2,316.00 


1,284.00 


25,000 


2,640.00 


1,470.00 


2,496.00 


1,389.00 



APPENDIX B 



197 



TABLE SHOWING THE TOTAL TAX PAYABLE UPON CERTAIN 
INCOMES UNDER THE RATES OF THE PRESENT LAW AND 
UNDER THE SUGGESTED RATES 



NET 


SINGLE PERSON 
UNEARNED INCOME 


MARRIED MAN WITH Two 
DEPENDENTS 
UNEARNED INCOME 


INCOME 


Present law 


Proposed 


Present law 


Proposed 






law 




law 


$30,000 


$3,600 


$2,720 


$3,456 


$2,612 


40,000 


5,920 


4,600 


5,776 


4,492 


50,000 


8,720 


6,740 


8,576 


6,632 


100,000 


30,220 


19,900 


30,076 


19,792 


150,000 


58,220 


35,400 


58,076 


35,292 


200,000 


86,720 


50,900 


86,576 


50,792 


250,000 


115,720 


66,400 


115,576 


66,292 


300,000 


144,720 


81,900 


144,576 


81,792 


400,000 


202,720 


112,900 


202,576 


112,792 


500,000 


200,720 


143,900 


260,576 


143,792 


1,000,000 


550,720 


298,900 


550,576 


298,792 



APPENDIX O 



Treasury Department 
April 5, 1924. 



ESTIMATED AMOUNT OF WHOLLY TAX-EXEMPT SECURITIES 
OUTSTANDING FEBRUARY 29, 1921 

(Revised basis} l 



ISSUED BY 


GKOS AMOUNT 


AMOTTNT HELD 
IN TREASURY 

OH IN 

SIN KIN u FUNDS 


AMOUNT HELD 
OUTSIDE OP 
TREASURY AND 
SINKING FUNDS 


States, counties, 
cities, cto. . . . 
Territories, insular 
possessions, and 
District of Co- 
lumbia .... 
United States Gov- 
ernment . . . 
Federal land banks, 
intermediate 
credit banks, and 
joint stock land 
banks 


811,378,000,000 

125,000,000 
2,294,000,000 

1,310,000,000 


$1,707,000,000 

20,000,000 
755,000,000 

104,000,000 * 


$9,671,000,000 

105,000,000 
1,539,000,000 

1,206.000,000 


Total Fob 29, 1924 


$15,107,000,000 


$2,586,000,000 


$12,521,000,000 


Comparative totals: 
December 31, 1923 
December 3 1,1922 
December 31, 19 IS 
December 31, 1912 


$14,885.000,000 
13,652,000,000 
9,50(5,000,000 
6,554,000,000 


$2,564,000,000 
2,331.000,000 
1,799,000,000 
1,468,000,000 


$12,321,000,000 
11, .321,000,000 
7,707,000,000 
4,08(1,000,000 



1 Since issuing the estimate of January 1, 1924, the method of estimating 
has been revised and as a result both the gross amount of securities out- 
standing and the amount held in sinking funds have been substantially 
increased but the net amount outstanding except for the normal growth 
has been changed but slightly. 

a Total amount of State and local sinking funds. 

' Total amount of sinking funds and amount held in trust by the Treasurer 
of the United States. 

Amount held in trust by the Treasurer of the United States. 

Bee Note (4), also partly owned by the United States Government. 

198 



APPENDIX C 



199 



The Growth of Tax-Exempt Securities in the 
United States 

The amount of State and local securities 
outstanding in the United States has in- 
creased with greater rapidity than the 
amount of corporate and other securities 
(exclusive of United States Government se- 
curities) during the past few years, as shown 
in the following tables: 

TABLE I. TOTAL SECURITIES FLOATED IN THE UNITED 
STATES, TOTAL STATE AND LOCAL SECURITIES, AND PER 
CENT OF STATE AND LOCAL TO TOTAL 1912-1023 

(000,000 omitted) 



YEAR 


TOTAL SECURITIES 
FLOATED IN THE 
UNITED STATKS 
(EXCLUSIVE OF U. 8. 
GOV'T OBLIGATIONS) 


TOTAL STATE AND 
LOCAL SECURITIES 
FLOATED IN THE 
UNITED STATES 


PER CENT 
OF STATE 
AND LOCAL 
TO TOTAL 


1912 . . . 


$3,952 * 


$387 


9.79 


1913 . . . 


2,952 i 


403 


13.65 


1914 . . . 


2,998 * 


474 


15.81 


1915 . . . 


3,998 * 


499 


12.48 


1916 . . . 


5,438 i 


457 


8.40 


1917 . . . 


3,641 l 


451 


12.39 


1918 . . . 


2,877 J 


297 


10.32 


1919 . . . 


4,286 


692 


16.15 


1920 . . . 


4,010 


683 


17.03 


1921 . . . 


4,204 


1,209 


28.76 


1922 . . . 


5,245 


1,102 


21.01 


1923 . . . 


4,986 


1.032 


20.70 



i The figures of total securities floated in the United States 1912-1018 are 
estimate* made by the Harvard University Committee on Economic Re- 
search based upon data from various sources. They are supposed to in- 
clude both foreign and domestic securities, new and refunding, floated in 
the United States during the period in question. All other figures are 
taken from the Commercial and Financial Chronicle. 



200 TAXATION: THE PEOPLE'S BUSINESS 



TABLE II. NEW CAPITAL ISSUES OF CORPORATIONS AND 

STATES AND MUNICIPALITIES IN THE UNITED STATES 

1913-1923 





AMOUNTS 


INDEX NUMBERS 






(1910 BASIS) 


YEAR 


Corporate 
Securities 


State and Local 
Securities 


Corporate 
Securities 


State and 
Local 
Securities 


1913 


$1,646,000,000 


$376,234,691 


71 


55 


1914 


1,437,000,000 


1 464,727,871 


62 


69 


1915 


1,435,000,000 


466,433,730 


62 


69 


1916 


2,187,000,000 


433,735,031 


95 


64 ] , 


1917 


1,530,000,000 


435,873,593 


66 


64 


191cS 


1,345,000,000 


286,831,077 


58 


42 ' 


1919 


2,303,328,636 


678,187,262 


100 


100 


1920 


2,710,011,386 


671,765,574 


118 


99 I 


1921 


1,823,004,851 


1,199,396,561 


79 


177 


1922 


2,335,734,207 


1,070,901,057 


101 


158 


1923 


2,730,796,155 


1,013,786,164 


119 


149 



Corporate issues 1913-1918 from Review of Economic Statistics (Har- 
vard University Press \ May 25, 1921, p. 98. Includes both new and re- 
funding issues; these figures include only those which have been reported 
and not additional estimates. All other figures from the Commercial and 
Financial Chronicle. 



Table I shows that State and local securi- 
ties have constituted a much larger propor- 
tion of the securities floated in the United 
States since 1919 than they did in earlier 
years. Table II differs from Table I in 
that only corporate securities have been used 
in the first column and that refunding issues 
have been omitted wherever possible. In 
the eleven years shown the amount of State 



APPENDIX C 201 

and local securities issued annually has in- 
creased with greater rapidity than the 
amount of corporate securities. The index 
numbers show that the great increase in the 
State and local securities issued in the last 
three years has not been paralleled by issues 
of corporate securities. 

TABLE III. ESTIMATED AMOUNT OF WHOLLY TAX-EXEMPT 
SECURITIES IN THE UNITED STATES, EXCLUSIVE OF THOSE 
HELD IN TREASURY, SINKING AND TRUST FUNDS. 1912- 
1923 l 

DECEMBER 31 TAX EXEMPT-SECURITIES 

1912 $4,086,000,000 

1913 4,338,000,000 

1914 4,789,000,000 

1915 5,188,000,000 

1916 5,623,000,000 

1917 7,994,000,000 

1918 7,707, 000,000 2 

1919 8,506,000,000 

1920 9,804,000,000 

1921 10,586,000,000 

1922 11,321,000,000 

1923 12,309,000,000 

1 The figures for State and local debt for 1912 and 1922 are baaed on the 
Census compilations. For the intermediate year interpolations have been 
made on the basis of annual issues. The actual amounts of Federal Gov- 
ernment and Farm loan tax-exempt issues have been added to the estimates 
for each year. 

The decline in 1918 was due to the fact that very few State and local 
bonds were issued, and over half a billion of wholly tax-exempt First 
Liberty 3> per cent bonds were converted during the year to 4's or 4>i s 
which are not wholly tax exempt. 

This does not include the Victory 3$ per cent notes outstanding, as 
separate figures for the Victory 394's and 4&'s were not available for 1919. 
The Victory 3^'a are included in 1920 and 1921, but not in 1922, as they 
matured before the end of the year. 

Table III includes all wholly tax-exempt 
securities outstanding except those in the 



202 TAXATION: THE PEOPLE'S BUSINESS 

United States Treasury, sinking funds and 
trust funds. Both in 1912 and in 1922 the 
State and local securities composed about 
three-fourths of the total tax-exempt securi- 
ties outstanding. Reliable figures as to the 
amounts of all other securities outstanding 
are not available. 



APPENDIX D 

LETTER FROM MR. A. W. GREGG, ASSISTANT TO 

THE SECRETARY OF THE TREASURY, 

TO THE HON. W. B. GREEN 

The letter from Mr. A. W. Gregg, Assistant 
to the Secretary of the Treasury, is, in part, 
as follows : 

January 4, 1924. 
Hon. W. E. GREEN, 

Chairman Ways and Means Committee, 

House of Representatives. 

MY DEAR MR. CHAIRMAN: Prior to its ad- 
journment before the holidays the committee 
requested that I prepare for the assistance 
of the committee a digest of the decisions 
and arguments affecting the question of 
whether Congress has the power to levy a tax 
upon the income from securities issued by 
States or political subdivisions thereof. In 
accordance with that request the following is 
submitted. 

Two questions will be considered, (1) 
whether the Federal Government has the gen- 

203 



204 TAXATION: THE PEOPLE'S BUSINESS 

eral power to lay a tax upon income derived 
from securities issued by States or political 
subdivisions thereof; (2) in the event that 
Congress may not lay a tax upon income from 
all such securities, whether the income from 
any obligation issued by States or political 
subdivisions thereof may be taxed by the 
Federal Government. 

The earliest decision of the Supreme Court 
upon the question of the power of the United 
States to tax State instrumentalities is The 
Collector v. Day (1870), 11 Wall. 113. Un- 
der the Civil War income tax acts a tax was 
assessed on the salary of Hay, a probate 
judge in Massachusetts. He paid the tax 
under protest and brought action to recover 
it. It was held by the Supreme Court that 
Congress had no power to impose a tax upon 
the salary of a State judicial officer. The 
court cited Dobbins v. Commissioners (1842), 
16 Pet. 435; McCulloch v. Maryland (1819), 
4 Wheat. 316; and Weston v. Charleston 
(1829), 2 Pet. 449, as establishing the propo- 
sition "that the State governments can not 
lay a tax upon the constitutional means em- 
ployed by the Government of the Union to 
execute its constitutional powers, " and con- 
cluded that, on the same principle, the United 



APPENDIX D 205 

States cannot tax the means and instrumen- 
talities employed by the States for carrying 
on their governmental operations. The 
court's reasoning is indicated in the follow- 
ing passage (pp. 125, 187) : 

It is admitted that there is no express 
provision in the Constitution that pro- 
hibits the General Government from tax- 
ing the means and instrumentalities of the 
States, nor is there any prohibiting the 
States from taxing the means and instru- 
mentalities of that Government. In both 
cases the exemption rests upon necessary 
implication and is upheld by the great 
law of self-preservation; as any govern- 
ment, whose means are employed in con- 
ducting its operations, if subject to the 
control of another and distinct govern- 
ment, can exist only at the mercy of that 
government. 

* * * the means and instrumentalities 
employed for carrying on the opera- 
tions of their governments, for preserving 
their existence, and fulfilling the high and 
responsible duties assigned to them in the 
Constitution, should be left free and un- 
impaired, should not be liable to be crip- 



206 TAXATION: THE PEOPLE'S BUSINESS 

pled, much less defeated, by the taxing 
power of another government * * * 

This decision was followed in the cases of 
a judge of the superior court of New York 
City (Freedman v. Sigel (1875), Fed Gas. No. 
5989) and of a State's attorney in Maryland 
(U. S. v. Kitchie (1872), Fed. Gas. No. 16168). 

In the case of Pollock v. Farmer's Loan & 
Trust Co. (1895), 157 U. S. 429, a bill by 
a stockholder to enjoin the defendant cor- 
poration from paying an income tax under 
the act of August 15, 1894 (28 Stat. 309), it 
was urged that the act was unconstitutional 
on the grounds, (1) that in imposing a tax on 
the income or rents of real and personal prop- 
erty, it imposed a direct tax upon the prop- 
erty itself, which was void because not ap- 
portioned among the Stal js; (2) that in im- 
posing indirect taxes, ic violated the consti- 
tutional requirement of uniformity; (3) that 
in imposing a tax upon income received from 
State and municipal bonds, it exceeded the 
constitutional powers of the Federal Govern- 
ment. With reference to this third point, 
Chief Justice Fuller said (p. 585) : 

It is contended that alth' agh the prop- 
erty or revenues of the States or their in- 



APPENDIX D 207 

strumentalities cannot be taxed, never- 
theless the income derived from State, 
county and municipal securities can be 
taxed. But we think the same want of 
power to tax the property or revenues of 
the States or their instrumentalities ex- 
ists in relation to a tax on the income 
from their securities, and for the same 
reason, and that reason is given by Chief 
Justice Marshall in Weston v. Charles- 
ton, 2 Pet. 449, 468, where he said: "The 
right to tax the contract to any extent, 
when made, must operate upon the power 
to borrow before it is exercised, and have 
a sensible influence on the contract. The 
extent of this influence depends on the 
will of a distinct government. To any 
extent, however inconsiderable, it is a 
burden on the operations of government. 
It may be carried to an extent which shall 
arrest them entirely. * * * The tax on 
Government stock is thought by this 
court to be a tax on the contract, a tax 
on the power to borrow money on the 
credit of the United States, and conse- 
quently to be repugnant to the Constitu- 
tion/' Applying this language to these 
municipal securities, it is obvious that 



208 TAXATION: THE PEOPLE'S BUSINESS 

taxation on the interest therefrom would 
operate on the power to borrow before it 
is exercised, and would have a sensible in- 
fluence on the contract, and that the tax 
in question is a tax on the power of the 
States and their instrumentalities to bor- 
row money, and consequently repugnant 
to the Constitution. 

It is clear, therefore, that prior to the adop- 
tion of the sixteenth amendment Congress 
had no power to levy a tax, directly or in- 
directly, upon securities issued by States or 
a political subdivision thereof. There re- 
mains to be considered the effect of the six- 
teenth amendment. 

The sixteenth amendment provides that: 
"The Congress shall have power to lay and 
collect taxes on incomes, from whatever 
source derived, without apportionment 
among the several States and without regard 
to any census or enumeration.' 7 

At the time the sixteenth amendment was 
being considered by the legislatures of the 
several States it was urged by various writers 
and public men {hat the proposed amendment 
gave Congress the power to tax the salaries 
of officers and employees of the States and 



APPENDIX D 209 

the income from State and municipal securi- 
ties. (See Foster, Income Tax, p. 78 et seq. ; 
Miner, The Proposed Income Tax Amend- 
ment, 15 Va. L. Reg. 737, 753; Hubbard, The 
Sixteenth Amendment, 33 Harvard Law Re- 
view, 794.) The contrary view was urged 
with equal strength. (See Cong. Rec., vol. 
45, pp. 1694-1699, 2245-2247, 2539-2540, and 
Ritchie, Power of Congress to Tax State Se- 
curities, 5 Am. Bar Assoc. Journal, 602.) 

In the first case which arose under the six- 
teenth amendment, the case of Brushaber v. 
Union Pacific R. R. Co., 240 U. S. 1, the Su- 
preme Court committed itself on the question 
of whether or not the sixteenth amendment 
gave to Congress any new power of taxation. 
This case was a suit by a stockholder to re- 
strain the defendant corporation from paying 
an income tax imposed by the tariff act of 
1913, on the ground that it was unconsti- 
tutional. Chief Justice White, in the course 
of upholding the validity of the act, said (pp. 
17, 18, 19) : 

It is clear on the face of this text that 
it (the amendment) does not purport to 
confer power to levy income taxes in a 
generic sense an authority already pos- 



210 TAXATION: THE PEOPLE'S BUSINESS 

sessed and never questioned or to limit 
and distinguish between one kind of in- 
come taxes and another, but that the whole 
purpose of the amendment was to relieve 
all income taxes when imposed from ap- 
portionment from a consideration of the 
source whence the income was derived. 
Indeed, in the light of the history which 
we have given and of the decision in the 
Pollock case and the ground upon which 
the ruling in that case was based, there 
is no escape from the conclusion that the 
amendment was drawn for the purpose of 
doing away for the future with the prin- 
ciple upon which the Pollock case was 
decided; that is, of determining whether 
a tax on income was direct, not by a con- 
sideration of the burden placed on the 
taxed income upon which it directly op- 
erated, but by taking into view the burden 
which resulted on the property from which 
the income was derived, since in express 
terms the amendment provides that in- 
come taxes, from whatever source the in- 
come may be derived, shall not be sub- 
jected to the regulation of apportion- 
ment. * * * 

Indeed, from another point of view, the 



APPENDIX D 211 

amendment demonstrates that no such 
purpose was intended and on the contrary 
shows that it was drawn with the object 
of maintaining the limitations of the Con- 
stitution and harmonizing their opera- 
tion. * * * 

* * * The purpose was not to 
change the existing interpretation except 
to the extent necessary to accomplish the 
result intended ; that is, the prevention of 
the resort to the sources from which a 
taxed income was derived in order to 
cause a direct tax on the income to be a 
direct tax on the source itself and thereby 
to take an income tax out of the class of 
excises, duties and imposts and place it 
in the class of direct taxes. 

Again, in Staiiton v. Baltic Mining Co. 
(1916), 240 U. S. 103, an action in form simi- 
lar to the Brushaber case, Chief Justice 
White said, in upholding the constitutionality 
of the same act (p. 112) : 

* * * But aside from the obvious error 
of the proposition intrinsically con- 
sidered, it manifestly disregards the fact 
that by the previous ruling it was settled 
that the provisions of the sixteenth 



212 TAXATION: THE PEOPLE'S BUSINESS 

amendment conferred no new power of 
taxation, but simply prohibited the previ- 
ous complete and plenary power of in- 
come taxation possessed by Congress 
from the beginning from being taken out 
of the category of indirect taxation to 
which it inherently belonged and being 
placed in the category of direct taxation, 
subject to apportionment by a considera- 
tion of the sources from which the income 
was derived; that is, by testing the tax 
not by what it was a tax on income, but 
by a mistaken theory deduced from the 
origin or source of the income taxed. 
Hark, of course, in saying this we are 
not here considering a tax not within the 
provisions of the sixteenth amendment; 
that is, one in which the regulation of ap- 
portionment or the rule of uniformity is 
wholly negligible, because the tax is one 
entirely beyond the scope of the taxing 
power of Congress and where conse- 
quently no authority to impose a burden 
either direct or indirect exists. 

Similar dicta occur in Eisner v. Macomber 
(1920), 252 U. S. 189, 204, and in Peck & Co. 
v. Lowe (1915), 247 U. S. 165. 



APPENDIX D 218 

Although it appears that in none of these 
cases was it necessary to pass upon the issue, 
it is significant that the court saw fit to 
announce in each of them that the amendment 
did not extend the taxing power of Congress 
to cover any new subjects. 

The opinion of Evans v. Gore (1920), 253 
U. S. 245, throws a more direct light upon 
the views of the Supreme Court regarding 
the scope of the sixteenth amendment. The 
action therein was brought by a United States 
district judge, appointed in 1899, to recover 
a tax paid upon his salary under the revenue 
act of 1918 (40 Stat. 1062). His chief con- 
tention was that the effect of the act, in im- 
posing a tax on his salary, was to diminish 
his compensation, and that to this extent 
was repugnant to the third article of the Con- 
stitution, providing that his salary should not 
be diminished during his continuance in of- 
fice. The court came to the conclusion that 
the prohibition prevented diminution by tax- 
ation, and the court, after reciting the his- 
tory of the adoption of the sixteenth amend- 
ment, concluded: 

True, Governor Hughes, of New York, 
in a message laying the amendment before 



214 TAXATION: THE PEOPLE'S BUSINESS 

the legislature of that State for ratifica- 
tion or rejection, expressed some appre- 
hension lest it might be construed as ex- 
tending the taxing power to income not 
taxable before ; but his message promptly 
brought forth from statesmen who par- 
ticipated in proposing the amendment 
such convincing expositions of its pur- 
pose, as here stated, that the apprehension 
was effectively dispelled and ratification 
followed. 

Thus the genesis and words of the 
amendment unite in showing that it does 
not extend the taxing power to new and 
excepted subjects, but merely removes all 
occasion otherwise existing for an appor- 
tionment among the States of taxes laid 
on income, whether derived from one 
source or another. And we have so held 
in other cases. 

In conclusion, then, it is evident that, since 
the ratification of the sixteenth amendment, 
the Supreme Court of the United States, in 
dicta and decision, has consistently adhered 
to the view that the amendment does not ex- 
tend the taxing power of Congress to new 
or excepted subjects. Prior to the adoption 



APPENDIX D 215 

of the sixteenth amendment, it was estab- 
lished that, in general, income from State 
and municipal bonds was exempt from taxa- 
tion by the Federal Government. In view of 
these two lines of decisions it appears evi- 
dent to me that, in the absence of a consti- 
tutional amendment, a tax upon the income 
derived from State and municipal securities 
would be held by the Supreme Court to be 
beyond the constitutional powers of Con- 
gress. 

****** 

Eespectfully, 

A. W. GEEGG. 



APPENDIX E 

ADDBESS OF THE PBESEDEBTT OF THE UNITED 

STATES BEFORE THE NATIONAL! REPTJBLJ- 

OAK CL.TJB AT THE WAXJDOBF-ASTOBIA, 

NEW YOBK, FEBBUABY 12, 1924 

The President said, in part, as follows : 
Out of an income of about $60,000,000,000 a 
year the people of this country pay nearly 
$7,500,000,000 in taxes, which is over $68 for 
every inhabitant of the land. Of this amount 
the National Government collects about $3,- 
200,000,000, and the State and local govern- 
ments about $4,300,000,000. As a direct bur- 
den this is a stupendous sum, but when it is 
realized that in the course of our economic 
life it is greatly augmented when it reaches 
the consumer in the form of the high cost of 
living, its real significance begins to be ap- 
preciated. The national and local govern- 
ments ought to be unremitting in their efforts 
to reduce expenditures and pay their debts. 
This the National Government is earnestly 
seeking to do. The war cost of more than 

216 



APPENDIX B 217 

$40,000,000,000 is already nearly half paid. 
Amid the disordered currencies of the war- 
ring nations our money is, and has been main- 
tained, at the gold standard. Our budget has 
long since been balanced, and our debt-paying 
program is at the rate of $500,000,000 each 
year. In spite of all these expenditures, the 
next fiscal year has an estimated surplus 
revenue of over $300,000,000. 

This represents a great financial achieve- 
ment in the past three years. In the first 
place, it was necessary to provide for more 
than $7,000,000,000 of short-term securities. 
These have all either been paid or refunded, 
so that they will become due in the future at 
orderly intervals, when they can be retired 
or further extended. When it is realized that 
such large loans were made in a way that not 
only left business undisturbed, but was 
scarcly perceptible to the public, the skill 
with which Secretary Mellon managed them 
can well be appreciated. 

Coincident with this was the even greater 
task of reducing national expenditures. 
Through legislative enactment and executive 
effort this has gone steadily forward, and is 
now proceeding from day to day. Under the 
watchful care of the Budget Bureau every 



218 TAXATION: THE PEOPLE'S BUSINESS 

department is constantly striving to elimi- 
nate all waste and discard every unnecessary 
expense. 

Every reasonable effort has been made to 
secure the liquidation of our international 
debts. The largest, which was that of Great 
Britain, and which amounted with accumu- 
lated interest to $4,600,000,000, has been set- 
tled on terms that provide for its payment 
over a period of 62 years. Interest runs at 
3 per cent until 1933, and after that 3^2 per 
cent. This calls for payments in the imme- 
diate future of $160,000,000 and more a year. 
They have the option to pay us in our own 
bonds, and in its practical working this agree- 
ment does not involve cash payments to this 
country, but pimply a mutual cancellation of 
debts. The funding of the British debt was 
one of the greatest of international financial 
transactions. It had its effect on business 
confidence, which was world wide. It demon- 
strated the determination of a great empire 
faithfully to discharge its international obli- 
gations. In this respect it was much more 
than a financial transaction, it was an exhi- 
bition of the highest type of international 
honor. It showed that the moral standards 
of the world were going to be maintained. 



APPENDIX B 219 

All of this has laid the foundation for na- 
tional tax reduction and reform. In time of 
war finances, like all else, must yield to na- 
tional defense and preservation. In time of 
peace finances, like all else, should minister to 
the general welfare. Immediately upon my 
taking office it was determined after confer- 
ence with Secretary Mellon that the Treas- 
ury Department should study the possibility 
of tax reduction for the purpose of securing 
relief to all taxpayers of the country and 
emancipating business from unreasonable 
and hampering exactions. The result was the 
proposed bill, which is now pending before 
the Congress. It is doubtful if any measure 
ever received more generous testimony of 
approval. Opposition has appeared to some 
of its details, but to the policy of immediate 
and drastic reduction of taxes, so arranged 
as to benefit all classes and all kinds of busi- 
ness, there has been the most general appro- 
bation. These recommendations have been 
made by the Treasury as the expert financial 
adviser of the Government. They follow, in 
their main principle of a decrease in high 
surtaxes, which is only another name for war 
taxes, the views of the two preceding Secre- 
taries of the Treasury, both of them Demo- 



220 TAXATION: THE PEOPLE'S BUSINESS 

crats of pronounced ability. They are non- 
partisan, well thought out, and sound. They 
carry out the policy of reducing the taxes of 
everybody, especially people of moderate 
income. They give to the country almost a 
million dollars every working day. 

The proposed bill maintains the fixed policy 
of rates graduated in proportion to ability 
to pay. That policy has received almost uni- 
versal sanction. It is sustained by sound 
arguments based on economic, social, and 
moral grounds. But in taxation, like every- 
thing else, it is necessary to test a theory by 
practical results. The first object of taxation 
is to secure revenue. When the taxation of 
large incomes is approached with that in 
view, the problem is to find a rate which will 
produce the largest returns. Experience 
does not show that the higher rate produces 
the larger revenue. Experience is all in the 
other way. When the surtax rate on incomes 
of $300,000 and over was but 10 per cent, 
the revenue was about the same as when it 
was at 65 per cent. There is no escaping the 
fact that when the taxation of large incomes 
is excessive, they tend to disappear. In 1916 
there were 206 incomes of $1,000,000 or more. 
Then the high tax rate went into effect. 



APPENDIX B 221 

The next year there were only 141, 
and in 1918 but 67. In 1919 the num- 
ber declined to 65. In 1920 it fell to 33, 
and in 1921 it was further reduced to 21. I 
am not making any argument with the man 
who believes that 55 per cent ought to be 
taken away from the man with $1,000,000 in- 
come, or 68 per cent from a $5,000,000 income ; 
but when it is considered that in the effort to 
get these amounts we are rapidly approach- 
ing the point of getting nothing at all, it is 
necessary to look for a more practical 
method. That can be done only by a reduc- 
tion of the high surtaxes when viewed solely 
as a revenue proposition, to about 25 per 
cent. 

I agree perfectly with those who wish to 
relieve the small taxpayer by getting the 
largest possible contribution from the people 
with large incomes. But if the rates on large 
incomes are so high that they disappear, the 
small taxpayer will be left to bear the entire 
burden. If, on the other hand, the rates are 
placed where they will produce the most rev- 
enue from large incomes, then the small tax- 
payer will be relieved. The experience of the 
Treasury Department and the opinion of the 
best experts place the rate which will collect 



222 TAXATION: THE PEOPLE'S BUSINESS 

most from the people of great wealth, thus 
giving fhe largest relief to people of moderate 
wealth, at not over 25 per cent. 

A very important social and economic ques- 
tion is also involved in high rates. That is 
the result taxation has upon national devel- 
opment. Our progress in that direction 
depends upon two factors personal ability 
and surplus income. An expanding pros- 
perity requires that the largest possible 
amount of surplus income should be invested 
in productive enterprise under the direction 
of the best personal ability. This will not 
be done if the rewards of such action are very 
largely taken away by taxation. If we had 
a tax whereby on the first working day the 
Government took 5 per cent of your wages, 
on the second day 10 per cent, on the third 
day 20 per cent, on the fourth day 30 per 
cent, on the fifth day 50 per cent, and on the 
sixth day 60 per cent, how many of you would 
continue to work on the last two days of the 
week? It is the same with capital. Surplus 
income will go into tax-exempt securities. 
It will refuse to take the risk incidental to 
embarking in business. This will raise the 
rate which established business will have to 
pay for new capital, and result in a marked 



APPENDIX E 223 

increase in the cost of living. If new capital 
will not flow into competing enterprise the 
present concerns tend toward monopoly, in- 
creasing again the prices which the people 
must pay. 

The high prices paid and low prices re- 
ceived on the farm are directly due to our 
unsound method of taxation. I shall illus- 
trate this by a simple example: A farmer 
ships a steer to Chicago. His tax, the tax 
on the railroad transporting the animal, and 
of the yards where the animal is sold, go into 
the price of the animal to the packer. The 
packer's tax goes into the price of the hide 
to the New England shoe manufacturer. The 
manufacturer's tax goes into the price, to the 
wholesaler, and the wholesaler's tax goes 
into the price to the retailer, who in turn adds 
his tax in the price to the purchaser. So it 
may be said that if the farmer ultimately 
wears the shoes he pays everybody's taxes 
from the farm to his feet. It is for these 
reasons that high taxes mean a high price, 
level, and a high price level in its turn means 
difficulty in meeting world competition. 
Most of all, the farmer suffers from the 
effect of this high price level. In what he 
buys he meets domestic costs of high taxes 



224 TAXATION: THE PEOPLE'S BUSINESS 

and the high price level. In what he sells he 
meets world competition with a low price 
level. It is essential, therefore, for the good 
of the people as a whole that we pay not so 
much attention to the tax paid directly by 
a certain number of taxpayers, but we must 
devote our efforts to relieving the tax paid 
indirectly by the whole people. 

Taken altogether, I think it is easy enough 
to see that I wish to include in the program a 
reduction in the high surtax rates, not that 
small incomes may be required to pay more 
and large incomes be required to pay less, 
but that more revenue may be secured from 
large incomes and taxes on small incomes 
may be reduced ; not because I wish to relieve 
the wealthy, but because I wish to relieve the 
country. 

The practical working out of the proposed 
schedules is best summarized by the Treas- 
ury experts, who find that $92,000,000 a year 
will be saved to those who have incomes 
under $6,000; $52,000,000 to those who have 
incomes between $6,000 and $10,000 ; and that 
less than 3 per cent of the proposed reduc- 
tion would accrue to those who have incomes 
of $100,000 or more. A married man with 
two children, having an income of $4,000, 



APPENDIX E 225 

would have his tax reduced from $28 to 
$15.75; having $5,000, from $68 to $38.25; 
having $6,000, from $128 to $72; having 
$8,000, from $276 to $144; and having 
$10,000, from $456 to $234. 

In order to secure these results, the admin- 
istration bill proposes to reduce the tax on 
earned income 25 per cent, and the normal 
tax on unearned income also 25 per cent. 
This would apply to all incomes alike, great 
and small, and would provide general and 
extensive relief. Further reductions would 
be secured by increasing the amount of in- 
come, exempt from surtaxes, from $6,000 to 
$10,000. Such surtaxes increase progres- 
sively until on incomes of $100,000 or more 
they reach the maximum of 25 per cent which, 
with the normal tax of 6 per cent, make 
large incomes pay in all 31 per cent. It is 
also proposed to repeal many troublesome 
and annoying rates, such as admission taxes 
and sales taxes, the existence of which is 
reflected in the increased cost of doing busi- 
ness and the higher prices required from the 
people. 

That is the tax measure which has been 
proposed, and which has my support. Be- 
cause I wish to give to all the people all the 



226 TAXATION: THE PEOPLE'S BUSINESS 

relief which it contains, I am opposed to 
material alteration or to compromise. It is 
about as far removed as anything could be 
from any kind of partisanship. At least, I 
do not charge that there is any party or any 
responsible party leadership that admits it 
is opposed to making taxes low and in favor 
of keeping taxes high. But the actions and 
proposals of some are liable to have just that 
result. I stand on the simple proposition 
that the country is entitled to all the relief 
from the burden of taxation that it is pos- 
sible to give. The proposed measure gives 
such relief. Other measures which have 
been brought forward do not meet this re- 
quirement. They have the appearance of 
an indirect attempt to defeat a good measure 
with a bad measure. You have heard much 
of the Garner plan. Brought forward to 
have something different, it purported to re- 
lieve the greatest number of taxpayers. It 
gave not the slightest heed to the indirect 
effect of high taxes, or to the approaching 
drying up of the source of revenue and con- 
sequent failure of the progressive income 
tax, or to the destruction of business initia- 
tive. It is political in theory. When the 
effect of its provisions was estimated, it 



APPENDIX E 227 

meant a loss of revenue beyond the expected 
surplus. It is impossible in practice. The 
people will not be misled by such proposals. 
It is entirely possible to have a first-class 
bill. I want the country to have the best 
there is. I am for it because it will reduce 
taxes on all classes of income. I am for it 
because it will encourage business. I am for 
it because it will decrease the cost of living. 
I am for it because it is economically, so- 
cially, and morally sound. 

But the people of the Nation must under- 
stand that this is their fight. They alone can 
win it. Unless they make their wishes known 
to the Congress without regard to party this 
bill will not pass. I urge them to renewed 
efforts.