Taxes: A Gift for the Man Who Has Everything
Lekachman, Robert
WHAT IS A GOOD TAX LAW? Radicals are likely to apply three criteria to legislative handiwork. If, as economists in the days of the Old Welfare economics used to believe and socialists...
...There is good reason to police and restrain such inappropriate uses of tax exemption...
...It is a sales tax, levied at each stage of fabrication and distribution, upon value contributed at that stage...
...I HAVE WRITTEN ENOUGH and more to explain why I judge the Tax Reform Act of 1969 the neatest conservative trick since the Kennedy administration began giving away money to the rich in the sacred name of economic growth...
...Let me now demonstrate the badness by applying the three radical criteria that I have identified...
...From now on, when these sums exceed $30,000, every dollar in excess of that figure will be subject to the confiscatory impost of 10 percent...
...The poor get two breaks: larger exemptions (by 1973, $750 per person instead of the present $600) and bigger standard deductions (by 1973, $2,000 or 15 percent instead of the current $1,000 or 10 percent...
...I am aware that taxes tend to glaze the eyes of all but inveterate accountants, lawyers, economists, and masochists...
...In this Congress, one should perhaps be grateful that the outcome did not add significantly to the burdens borne by the enlightened...
...It is neither paradox nor faulty reasoning which has led Milton Friedman and his Chi cago associates to advocate tax reduction even in time of inflation and in the face of the con ventional Keynesian wisdom that teaches the necessity of the opposite fiscal course...
...This is inequitable standing by itself...
...Unfortunately, Congress had its mind on a less constructive goal, control of some of the socially important work that the major foundations had begun to support...
...Good tax laws diminish inequality and bad ones increase it...
...All one can say about this fairy tale, I suppose, is that anyone who believes it has probably had his natural intellectual capacities dulled by too much graduate-school training...
...Impact upon Revenues THE MOST DEVASTATING FEATURE of the tax bill is its impact upon future tax receipts, the source of funds for new social programs in the post-Nixon future...
...None of the nips draws real blood, and nowhere does Congress even attempt to come to grips with the question of whether special treatment of certain taxpayers and certain kinds of transactions is justified at all...
...But little could better exemplify the disarray of urban liberals than the pitiful handful courageous enough to follow the Republican example of Javits and Goodell...
...Tax complexity is indeed one of the strongest protections of the crafty...
...The appearance has been given of real reform...
...I can think of no better way to complete a sketch of a measure warranted, as one CPA quoted by Business Week put it, to "keep us rich for 15 years," than to endorse the same periodical's sour editorial comment: As a reform bill, this one is pretty much a joke —albeit a bad one from the viewpoint of some taxpayers...
...Consumers, blessed with the right to select from the free market, cast their dollar votes for the products of some sellers and against the offerings of others...
...Rehabilitation of structurally sound residential property is to be subsidized to the extent of approximately $330 million annually...
...For all practical purposes, the loopholes are as large as ever and it is possible to do no more than speculate about some of the new ones cunningly inserted into law...
...A new requirement that foundations distribute annually all income aside from capital gains seems entirely justified...
...American cities are decreasingly safe, attractive, traversible, and endowed with such routine amenities as breathable air, drinkable water, unlittered streets, and adequate stocks of decent housing, because trivial sums have been expended on municipal services, schools, mass transportation, public housing, and environmental control let alone city planning and urban design...
...The rest of us can plan to pay the bill for a longtime to come...
...The present maximum rate on taxable income over $52,000-60 percent—will fall by 1973 to 50 percent...
...After its long labors, Congress has succeeded in finding the perfect gift for the man who has everything...
...Hence, a genuinely progressive income tax (as distinguished from the current contraption) is an excellent thing, and still better are confiscatory inheritance levies...
...The Treasury will garner another $3 billion from the repeal of the investment tax credit, if the major corporations do not succeed in passing on their higher taxes to their customers...
...One way of approaching a negative income tax, recently suggested by Yale's James Tobin, is the grant of a flat cash tax allowance per taxpayer and each of his dependents...
...Their drilling and exploration benefits are undisturbed, and so are other lucrative escape hatches of nearly equivalent value...
...When and if Vietnam releases some additional funds, it is highly probable that the military will gobble them up for their deadly toys, ABM's, new tanks, improved fighter planes, and so on...
...Southerners were aggravated by foundation-financed voter registration drives in black districts...
...For practical economists of good will the strongest argument for scaling down the progression was greater ease of loophole plugging and diminished pressure for tax avoidance...
...A major tax inevitably presents the appear ance if not necessarily the reality of offering something for everybody...
...It certainly did little to increase the load of the wicked...
...One can think of other worthy tax objectives, among them the subsidy of especially vulnerable groups and the amelioration of unemployment (where this second objective is not best served by increased public spending...
...The Ford Foundation has undoubt edly made its mistakes, but its biggest one would be a retreat into the role preferred by conservative congressmen...
...If anything, I have understated the harmful impact of this measure...
...Other sections of the law manifest small inclination either to penalize the harmful or reward the beneficial...
...The reward of innovation appears to have been Congressional wrath...
...What Kennedy began has been completed (one hopes...
...Allocation BOTH HOUSE AND SENATE spent an inordinate amount of time threatening punitive taxation of foundations...
...Realestate operators will be slightly more damaged...
...Neutrality in public administration is as mythological as the free market in the private sector...
...Only the federal tax system is capable of diverting the needed sums from private expenditure to public purpose...
...The appropriate goal of foundations is advancement of public purposes, not mere accumulation of assets...
...It amounts from its title onward to a major deception of the public...
...One or two exceptions deserve mention...
...Redistribution PROBABLY THE NEATEST and surely the most libertarian way to shift resources from the rich to the poor is to supplement -a steeply progressive personal income tax with a generous negative income tax...
...Unless the members of the second group are alert enough to change their ways promptly, they will achieve well-merited bankruptcy and thus release their resources (as the economist chastely puts it) for the use of their more gifted brethren...
...Never let it be said that Congress is soft on the rich...
...They will pay the rather small levy of 4 percent on investment income instead of the much higher rates originally proposed in the House Ways and Means Committee...
...If the time should ever come when a national wish to rescue the cities supersedes present apathy, then vast sums of money will be required to remedy the consequences of decades of neglect...
...The large taxpayer is treated with the delicacy that his status as major campaign contributor necessitates...
...Accordingly, Congress gave the elderly a 15 percent increase in their socialsecurity benefits, possibly enough to keep pace with rising consumer prices...
...How little the beneficiaries of tax-sheltered income will actually be damaged by the new law is im plied by the estimates of new revenue that will be derived...
...If, as economists in the days of the Old Welfare economics used to believe and socialists continue to believe, human beings are approximately equal in their rights and capacities to consume the good things of the earth, then a first standard is addressed to the measurement of inequality...
...by Nixon...
...Thus the 1970 contribution to social justice may be an unhappy combination of diminished progression in personal income taxation and increased collections from regressive taxes, even now a major reliance of state and local governments...
...The combined effect of these two changes will be to remove possibly as many as 5.5 million low-income individuals and families from the tax rolls...
...All the same, there is no reason to sneer at the combination of deduction and exemption changes which will improve the tax and income situation of the five and a half million taxpayers, who are quite poor even if not desperately deprived...
...And the tax document, 346 pages in length, unquestionably contains a host of sleepers that will gradually come to light over the next few years...
...The repeal of the investment tax credit removes a subsidy to businessmen, never justified for its social desirability...
...Before the new law, the Treasury could expect to collect an additional $15 billion per year from normal Gross National Product expansion of $30 billion to $40 billion annually...
...Taxes are equally capable of discouraging stock-market speculators, mineral-resource exploiters, conglomerate organizers, and expense-account virtuosi...
...After a good deal of flame and fury, the foundations will be subjected to a 4 percent tax on their investment income...
...Only the normal growth of federal revenues have provided a realistic source of funds for the cities and the poor...
...The ordinary citizen, thinking that a shrewd blow has been struck against the tax profiteers, will turn his attention to other issues...
...The performance contains a final twist...
...Although it is usually argued, though not very convincingly, that severely progressive incometaxation impairs the vital incentives of the thrusting and the talented, the same objection applies, if at all, only with diminished force to imposts upon the properties of the dead and departed...
...The lawmakers proved themselves capable of sternness too...
...Such a family derives no benefit at all from alterations in positive tax rates, or increases in exemptions and deductions, for the decisive reason that it pays no taxes to be reduced...
...At a most generous estimate the new imposts upon real estate, oil and minerals, banks, multiple corporations, foundations, mergers, and tax-sheltered income will earn the Treasury perhaps $3 billion, a trivial price to pay for the removal of COMMENTS AND OPINIONS pressure for genuine tax reform for years to come...
...If the taxes due on his earned income were less than this allowance, the Treasury would mail him a check for the difference...
...Other structures will wear along as best they can at 150 percent of costs...
...Mills and his conservative friends have consistently assaulted federal COMMENTS AND OPINIONS spending on anything except the Pentagon...
...At best then, Congress refrained from active discouragement or prohibition of foundation experiments with social change...
...The foundations have escaped comparatively lightly...
...After Nixon signed the bill, the Administration let it be known that the President may have to come back to Congress for new tax money...
...But the three criteria I have stressed seem best to differentiate egalitarian socialists from conventional Keynesians...
...Yet again Congress has proven itself a fearless defender of the strong...
...ALL OF THIS is a preliminary to a distressed examination of the measure that Congress passed in the waning days of 1969, the so-called "Tax Reform Act of 1969...
...What we now are presented with is less progression and just about the same assortment of loopholes as won some of their acceptance from the presence of much severer rates of assessment...
...quite a few have engaged in right-wing propaganda, and others have been guilty of some exceedingly devious commercial activities...
...Under 1969's tax steal it will fall all the way to 50 percent...
...Urban congressmen resented the Ford Foundation's role in the funding of CORE in Cleveland and of the public-school experiment in New York's Ocean Hill-Brownsville...
...It seems indeed more plausible that the children of millionaires will acquire increased incentives to burnish their talents and thus advance the public welfare if their incomes are narrowed by taxation than if they are permitted without further effort of their own to enjoy the fruits of their progenitors' financial acumen...
...For years, of course, the critics of foundations have deplored their targets' timidity and the conventionality of their grants...
...This modest move in the direction of equity would be more meaningful, however, if it were not joined to net deterioration at the other end of the income scale...
...The oil fat cats will pay an additional $435 million...
...I shall try all the same to summarize as briefly as possible the principal features of the new law and then consider how far it departs from radical criteria of desirability...
...The danger is real that foundations will be frightened back into safe grants to hospitals, universities, and medical research...
...It is almost, though not quite, enough to turn one into a Weatherman...
...To their shame Congressional liberals concurred...
...Radicals are likely to apply three criteria to legislative handiwork...
...Taxes can serve a third radical purposefinancing the dollar-starved public sector...
...That radical of his day, John Stuart Mill, was in 1848 proposing to tax away all inheritance estates save for small sums devoted to the education of the heirs...
...This is the way Con gressional coalitions are glued together and Presidents are prevented from vetoing their productions...
...He compelled Lyndon Johnson to accept an expenditure ceiling on all federal outlays as the prerequisite to House clearance of the 1968 surcharge...
...This is the major revenue consequence of the tax changes and, for reasons that will appear later, it is possibly the very worst feature of a notably bad piece of legislation...
...It had come belatedly to their attention that some exceedingly rich people had been sufficiently charitable, or sufficiently involved in oil, to pay no taxes at all...
...Despite much weeping and gnashing of teeth, all that the oil magnates face is a reduction of depletion allowances from 27' percent to 22 percent...
...It is worth remembering that before 1964's celebrated tax cut the top incremental rate was 91 percent...
...Mills compelled President Kennedy to slow the expansion of federal spending as the price of Ways and Means processing of the 1964 tax measure...
...For the average taxpayer, the most notable feature of the measure will be the January 1, 1970, reduction of the surcharge on personal income from 10 to 5 percent and its total disappearance on July 1, 1970...
...After the lobbyists for "good" causes like universities and foundations and bad ones like real estate and oil got done with what started as a "revolt" by ordinary taxpayers at the disgusting spectacle of the benefits and loopholes enjoyed by their sharper fellow citizens, what kind of legislative animal marched to the White House...
...New favorable amortization arrangements will presumably encourage the installation of antipollution equipment, at a cost to the Treasury of some $120 million each year...
...Thus a $150 per person tax allowance for a family of six with zero earned income would result in a $900 payment by the Treasury...
...I should hasten to interpolate my view that foundations have been a mixed blessing...
...The Tax Reform Act of 1969 either retains or accentuates the elements of the federal tax structure which have the effect of sheltering income from property and capital gains, encouraging speculation, enlarging the personal fortunes of reactionary oil men, permitting a favored minority to supplement its income with huge tax-free expense-account allowances, and stimulating the accumulation of vast individual estates...
...Although it is a neat technical device, it is at heart a sales tax—and sales taxes, notoriously, are the least equitable and the most regressive of all ways to raise money...
...If social scientists dared make value judgments, they might support tax stimulation of low-cost housing, books and periodicals, good music and good musicians, talented artists, and imaginative architects...
...Even a financial writer like Edwin Dale, who should know better, took the reform features seriously in a New Republic assessment...
...No one need be astounded by conservative inclinations to shift tax burdens from the strong and rich to the poor and weak...
...In voting against the measure, Senators Javits and Goodell emphasized this point which (to their discredit) very few of their liberal Democratic colleagues appeared to take seriously...
...Taxes can serve a second radical goal: the encouragement of socially useful and the discouragement of socially harmful private activities...
...COMMENTS AND OPINIONS The double depreciation allowance that used to apply to all construction in future will cover only new housing...
...No one should be astonished at his 1969 triumph, the conversion of a tax-reform sentiment into a tax-cut law...
...Fried man, as well as Congressman Wilbur Mills, has understood that if taxes are sufficiently reduced, a responsible President and Congress will, per force, cut the expenditure suit to fit the skimpy revenue cloth...
...No longer can the tax advisers of the affluent combine exempt income and charitable deductions with capital gains, stock options, bad-debt deductions, and personal property depreciation so as to reduce, quite legally,taxable income to zero...
...Congress has quite deliberately taken the money away...
...It is the more outrageous because Congress has further diminished the progression of the personal income tax...
...Many are little more than tax-avoidance and creator-glorification devices...
...The market, alleges conventional economic wisdom (pausing not to identify its biases and imperfections), makes impartial judgments...
...This, the leaks have it, will come from a valueadded levy, a favorite of the Common Market countries...
...The elimination of the surcharge sheared away $9 billion of the original $15 billion, and other changes took away practically the entire remainder...
...In the end the enemies of the foundations may win the war...
...The conference committee eliminated a Senate provision that would have terminated the life of a foundation at the end of 40 years...
...The fortunate first group prospers...
...The new "Draconian" rules will extract possibly $635 million from the multimillionaires who are presently paying little or nothing...
...It takes a nip here and a nip there —at the oil industry, at foundations, at capital gains...
...In the real world, the choice is usually between allowing one set of people rather than another to benefit from taxes and other legislative COMMENTS AND OPINIONS interventions...
Vol. 17 • March 1970 • No. 2
