Invitation to Indignation

To Congress and the public President Roosevelt last week gave the evidence which had caused him to release a blast at wealthy tax-dodgers (TIME, June 7). It was in the form of a 3,000 word letter from Secretary Morgenthau and amounted to a short course in the art of tax-dodging as perfected by high-priced lawyers.

Bill of Particulars. Mr. Morgenthau listed eight kinds of tax-dodging, all of which he classed as "moral fraud": 1) setting up personal holding companies in the Bahamas, Panama, Newfoundland and other places from which tax money cannot be extradited; 2) buying one-payment life insurance (from a Bahama company), borrowing back the "payment" and claiming tax deductions for interest paid on the loan;* 3) establishing personal holding companies in the U. S., which in spite of special taxes still pays those who are rich enough; 4) incorporating yachts, town houses, country estates, racing stables so that their operating losses can be claimed as deductions from income; 5) borrowing money from personal holding companies so as to claim the interest as an income deduction; 6) creating trusts for wife, children and relatives so as to divide family income and keep it out of the highest surtax brackets; 7) taking wives and children into partnership for the same purpose; 8) creating pension trusts, which pay reduced taxes, for the benefit not of ordinary employes but of a few high officers of a company. To these dodges Mr. Morgenthau added three others "which the law itself permits": 1) claims for depletion by oil and mining companies, which are allowed as a deduction from income and prevent the Treasury from collecting up to $75,000,000 a year; 2) dividing a husband's income with his wife in tax returns from the eight States which have community property laws,/- thereby reducing individual surtaxes; 3) the flat tax of 10% on U. S. income of nonresident aliens, imposed by the revenue law of 1936. This reduced the tax on the $300,000 income of an American-born woman who married an Englishman from $160,000 to $30,000.

American Morals. Said the President:

"Mr. Justice Holmes said, 'Taxes are what we pay for civilized society.' Too many individuals, however, want the civilization at a discount. . . .

"A feeling of indignation on reading this letter will, I am confident, be yours, as it was mine. . . .

"Very definitely, the issue immediately before us is the single one relating to the evasion or unethical avoidance of existing laws. . . . Already efforts to befog this issue appear. Already certain newspaper publishers are seeking to make it appear-- first, that if an individual can devise unanticipated methods to avoid taxes which the Congress intended him to pay, he is doing nothing unpatriotic or unethical; and second, that because certain individuals do not approve of high income-tax brackets, or the undistributed earnings tax, or the capital gains tax, the first duty of the Congress should be the repeal or reduction of those taxes. In other words, not one but many red herrings are in preparation. . . .

"The decency of American morals is involved. The example of successful tax-dodging by a minority of very rich individuals breeds efforts by other people to dodge other laws. . . ."

Program. In the last two paragraphs of his message Franklin Roosevelt, having invited Congress to become indignant, told Congress what he wanted done: "I am confident that the Congress will wish to enact legislation at this session specifically and exclusively aimed at making the present tax structure evasion-proof.

"I am confident also that the Congress will give to the Treasury all authority necessary to expand and complete the present preliminary investigation including, of course, full authority to summon witnesses and compel their testimony. The ramifications and the geographical scope of a complete investigation make it necessary to utilize every power of government which can contribute to the end desired."

Promptly a joint resolution was proposed in the Senate by Pat Harrison of Mississippi. It created a joint committee of six members each of the House and Senate, told them to report by Feb. 1 next, and added the further unusual provision that the committee could authorize any employe of the Treasury to conduct any part of the investigation and gave such Treasury employes power to hold hearings, subpoena witnesses and records.

The resolution was quickly passed by the Senate. When Representative Robert L. Doughton asked unanimous consent to have it immediately considered and adopted by the House, up rose Representative Maury Maverick of San Antonio, good friend of the New Deal, and objected. His reason: he wanted the House to know what it was voting on, let copies of the resolution be distributed and a committee consider it in due course. His objection was backed up by Chairman John O'Connor of the Rules Committee who detected that it might bring a big change in the political balance of power if Congress lent its power of inquisition to the Executive. The resolution was then rewritten so that Treasury officials could not hold public hearings, so that the right and responsibility of releasing headline scandal would remain in Congressional hands.

Red Herrings. By his reference to red herrings Franklin Roosevelt cannily disparaged all opposition in advance. Only faintly were heard the plaints of persons quoting judicial decisions to the effect that "anyone may so arrange his affairs that his taxes shall be as low as possible. . . . There is not even a patriotic duty to increase one's taxes . . . etc. etc.," and of those who have long maintained that any law, however well intentioned (example: Prohibition), is a bad law if it does not work, and that the income tax law does not work because it is already too complicated, the taxes already too high.

Unafraid of being accused as a herring-dragger, Columnist David Lawrence last week published this argument:

"A certain taxpayer does a great deal of work of the same kind that other persons do for pay. This work, while compensated for by the persons for whom the work is done, is for charity and the checks are not made out to the person who does the work, but are sent direct to the charities. This avoids the tax altogether.

"Now, if anybody else in business were to get, let us say, $100,000 in income and attempt to give it all to charity, the tax law says that only 15% is entitled to deduction or immunity from tax and that the other 85% bears the regular income tax rates.

"Would the President call it tax evasion or tax avoidance or unethical for such a person who wants to give his whole income to charity if the benefactor in question writes to all the companies from which he receives salary or dividends and tells them to make out the checks directly to the charities?"

This was something of a personal question although cloaked in impersonal language. It seemed very definitely to refer to Mrs. Roosevelt, who operates precisely so.

Nor did J. P. Morgan fear any herring accusations. Returning from England on the Queen Mary, he told shipnews reporters:

"Taxing is a legal question pure and simple. Anyone has the right to do anything as long as the law does not say it is wrong. I object strenuously to treating income tax evasion as a moral issue. If the Government objects to tax evaders it should change the law.

"Congress should know how to levy taxes. It is not up to us taxpayers to repair the mistakes of Congress."

*Apparently this does not work. Mr. Morgenthau reported that "five prominent Americans" who escaped $550,000 in taxes in four years, have now offered to pay up in full with interest.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.

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