. . . . How About Reforming Them?
When President Kennedy planned a tax cut in 1963 to stimulate a sluggish economy, he coupled his proposal with various tax-reform measures. It was a big mistake; Congress, the Executive, and lobbyists spent months haggling over the measure. President Johnson, who must have learned from the experience of his predecessor, is currently planning to propose tax reforms independently of his proposal for an income tax surcharge.
The inequities that the Administration is now studying cry out for correction, but most have little chance for serious Congressional consideration. The President has more pressing business to attend to: the condition of the national economy, Vietnam and its budgetary demands, and the Congressional attempts to cut his domestic programs. He will not be able to press Congress on reform. For its own part, Congress has a special aversion towards any reform of the tax system; often the financial interests closest to Congressmen happen to be the very beneficiaries of economic distortions and abuses.
There are many tax laws, which, though justified 25 years ago, today grant unfair benefits to some and impose undue burdens on others. One such tax law, which the President has specifically mentioned, concerns abuses by tax-exempt private foundations. He did not, however, mention tax-exempt churches or charitable organizations, which practice similar abuses. A tax-exempt foundation or organization can run a profitable business, then use those tax-exempt profits to purchase another business.
The foundation, therefore, can often afford to pay a substantially higher price in acquiring businesses than a tax-paying enterprise. To eliminate this unfair advantage, the Treasury Department has recommended legislation requiring private foundations to dispose of substantial business interests which are unrelated to their exempt activities. Congress has not acted on the proposal.
Congress has failed to act on a number of reasonable Treasury recommendations: to prohibit buying and selling of securities between a foundation and the family which established it; to require foundations to use their income currently (the existing law only prohibits foundations from accumulating "unreasonable" amounts of income); to require family-foundations to have public trustees within 25 years. It is hard to imagine why Congress did not pass these measures--unless personal interests were involved.
In a related situation, churches can operate a profitable, unrelated business and not be subject to taxation. A church can even buy a business, finance the purchase with a mortgage, lease back the business to the original operators, take in most of the earnings, and still be tax-exempt. An unrelated-business tax should definitely be extended to churches.
The most exasperating tax inequity is the 27.5 per cent oil depletion allowance applied to income from oil and gas property. Designed to compensate landowners for the exhaustion of natural oil deposits in the ground, the allowance originally could not exceed the amount invested. But percentage depletion allowance, begun in 1926, bears no relation to the amount first invested. Instead, the tax-free 27.5 per cent applies to the income from the oil and gas products. Eventual recovery in this manner often goes far beyond the actual investment costs.
More shocking than the allowance has been Congressional response to reform efforts. Twice President Truman proposed decreasing the allowance to 15 per cent. Each time, Congress enlarged the loophole instead of reducing it. President Kennedy's proposal for a cut and Senator Proxmire's more recent one were both handily defeated.
Another distortion in the tax system is the multiple surtax exemption for related corporations. Normally, corporations pay 22 per cent on all taxable income, but they pay a surtax of 26 per cent on all taxable income over $25,000. A corporation can avoid paying 48 per cent on its income over $48,000 by forming several subsidiaries, each with a taxable income of less than $25,000. There are other good reasons for forming subsidiaries, such as to limit a corporation's liability, but a single enterprise should not receive a bunch of surtax exemptions just because it is divided into subsidiaries. These exemptions cost the government an estimated $100 million-$200 million a year.
The abuse of industrial development bonds is a good example of how a well intentioned system becomes distorted. The system first developed in Mississippi 20 years ago. A city will borrow money to construct a building and then lease the structure to a private corporation. Because the city bonds are free, the interest rates are lower than they would be if the corporation itself borrowed the money and the lender had to pay taxes on the interest. Originally, the system benefited both struggling businesses and depressed areas. But as the practice has grown in the last few years, large corporations have exploited the device, in essence, converting their regular bonds into tax-exempt bonds. It distorts the local tax-exempt privileges, and in the long run simply forces the Federal tax system to support the financing.
From sheer neglect or indifferences, rate schedules and basic exemptions in estate and gift tax laws have remained unchanged in 25 years. In the meantime, complexities and inequities have cerpt into the system so that the present structure places the most importance on form and timing in the transference of property.
The fact that so many of the inequitable tax laws have been distorted for years without Congressional action is not an encouraging sign for reform now. It demonstrates the extent to which vested interests and traditional forces exert control over the nation's lawmakers. In some minor area, however, reforms are making progress. The President's proposal to change the method of taxing the elderly has been submitted as part of the Social Security amendments. It does not alter the revenue cost of the program, but merely redirects the relief in a uniform manner towards those who need it most--the poorest, who get the highest tax exemption, while the richest get the low exemption. It is this type measure, by which revenue changes but the balance remains the same, that stands the best chance of fullfilment in the current Congress.