Taxes: Evasion & Avoidance
To the Editor:
“How Progressive is Our Tax System?” by Robert J. Lampman (September) discusses a most important issue. . . . “Limiting the share of the rich and increasing the share of the poor and the middle income group” . . . sounds idealistic, but history has shown that when taxation reaches almost confiscatory levels the inevitable aftermath is a lower standard of living for the have-nots, rather than an improvement. . . . [Our] capitalist system depends on incentives, profits, and savings; I wander, if we had a more progressive tax system, where the $20,000 of investment per steel worker would come from. Professor Lampman frequently refers to the relatively small percentage of the affluent; but one per cent of our population is still 1,750,000 souls, probably 1,000,000 of them adults, who are the entrepreneurs and the chief suppliers of the risk capital that makes our economy great. . . .
During the war, many advocated restricting personal incomes to a maximum of $25,000. The plan was abandoned when it was discovered that such additional income would not cover the expenses of running the war for one day. If now the rates of lower-income families were substantially reduced or personal exemptions increased, where would we get the $80 billion needed for our annual national budget? . . . If the exemption was raised merely from $600 to $800, the loss of revenue would amount to several billion dollars. . . .
Professor Lampman argues that income taxes are not progressive enough. Let us examine the status of an affluent taxpayer in 1939 versus 1958. With a taxable income in 1939 of $50,000, he paid a tax of $10,000 and had $40,000 left. What was the situation of the same individual in 1958, even assuming that his taxable income had doubled to $100,000? If he was eligible to file a joint return, his tax would be $54,000 and he would have $46,000 left. . . . [But] he would now need, in terms of purchasing power, $80,000 to equal his $40,000 in 1939. To receive a net of $80,000 today, he would need a taxable income of $340,000 and would be in a 90 per cent tax bracket. . . .
I see no need to close so-called “loopholes” . . . . Would Professor Lampman eliminate the tax benefits of millions of home owners, whose interest and real estate tax payments are tax-deductible? Would he deny the head of family tax assistance in meeting extraordinary medical and dental expenses, bearing in mind that such tax assistance is given only on such expenses in excess of 3 per cent of his adjusted gross income? Would he eliminate as deductible items other taxes paid, including state income taxes? Would he eliminate, as a deduction, contributions made to religious and educational institutions, voluntary hospitals, etc.—or would he prefer to have most of these institutions supported directly by the federal government?
He does mention, as a means of avoiding a tax, dividends on stock, capital gains, and interest on tax-exempt bonds. Cash dividends on stock now have a 4 per cent tax credit, because the earnings of the corporation were already subject, before the dividend was paid, to a 52 per cent corporate tax. As for capital gains, many economists believe that if they are long-term, they are not income at all. . . . Even when the Labor party was in power in the United Kingdom, it did not advocate a capital-gains tax such as we have. As for taxing the interest on tax-exempt bonds, [this] would penalize every local and state government in the United States by reason of a very substantial increase in borrowing costs.
On the expense-account scandal, I agree with Professor Lampman. It is a disgrace, and a problem of better enforcement. . . . Several other very serious tax evasions . . . are not mentioned at all in his article. There are probably several billions of unreported earned income, primarily from cash transactions and especially those for personal services rendered by individuals. . . . Undersecretary of the Treasury Fred A. Scribner, Jr. reported that a Treasury examination of 1956 income tax returns discovered that taxpayers had failed to report almost $4,500,000,000 of interest and dividends received during the year. . . .
Tax evasion, by all taxpayers, is a much more serious problem than the author pictures it. Perhaps, if the three sources of tax evasion I have mentioned were closed, it would amount to as much revenue as would be gained by closing many of the so-called loopholes, most of which it would be economically unsound to change.
New York City
Professor Lampman writes :
Mr. Sahlman offers a tax reform program with two main points: (1) don’t soak the rich any harder than we now are doing, and (2) stop tax evasion, but preserve the present means of tax avoidance.
As to the first point let me urge again, as I did in my article, that data concerning nominal tax rates, as they are applied to hypothetical cases, are inadequate as a basis for making a judgment about how hard we are soaking the rich. There are important differences between total income and income subject to the full range of progressive rates; these alter the typical result very substantially. Further . . . how hard we tax the rich is a relative question, and surely it is relevant to know that no income class pays less than 25 per cent of its total income in taxes.
Concerning his second point, I stand with Mr. Sahlman in being opposed to tax evasion, which is generally defined as illegal dodging of a tax liability. In the article I made no mention of tax evasion in the form of underreporting or mis-reporting or claiming nonexistent grounds for reduction of taxes. There was reference to perfectly legal ways of minimizing tax liability. Ignoring evasion was deliberate; it has no clear connection with the theme of the article, which was the progressiveness of the over-all tax system. I would agree with Mr. Sahlman that evasion is a problem at all income levels.
With regard to the avoidance opportunities or so-called “loop-holes,” Mr. Sahlman does well to point out that there is a plausible rationale for each of them. Indeed, we can develop plausible-sounding reasons for deducting or excluding or exempting a great deal more income than we now do. The problem becomes one, then, of how far Congress wants to go in reducing the tax base for the purpose of subsidizing local governments, non-profit organizations, oil exploration, and so on. Often one of the consequences of thus reducing the tax base is substantial loss of progressiveness in the income tax, and greater reliance upon regressive tax forms.