Ways & Means

''As far as I am concerned, and my family and my wife, who are wealthy people, there has been provided $50,000,000,000 in tax-exempt securities in which we can invest our money and pay no part toward the support of the Government. I think that is a pernicious system." With this as a jumping-off point Doris Duke's husband, James Henry Roberts Cromwell, proceeded to tell the House Ways & Means Committee how to reform the U. S. tax system. He had flown straight from Honolulu and was fairly bursting with ideas. He wanted to abolish all income, gift, estate and corporation taxes, to replace them with a general manufacturers' sales tax which would force him and his wife to contribute more to the support of the Government.

Pushing back his spectacles in amazement, old Chairman Doughton asked: "Would you have the same rate on bread and wheat as cigarets and whiskey?" Mr. Cromwell: "Yes, sir." Thoroughly nettled, long-faced Congressman Fred Vinson quickly calculated that on the base suggested by Mr. Cromwell the sales tax would have to be 18%. This, Mr. Cromwell admitted, was "a little high." Thus, last week, like scores of other U. S. citizens, Husband Cromwell exercised his right to be heard on a new tax bill in the making.

More outstanding than the fact that Congress was face to face with the Taxpayer was another fact: the U. S. people, for the first time in history, were face to face with the Tax Collector--close enough to see the white of his eyes. Until the War, the U. S. Government was almost wholly supported by customs receipts and excises on liquor and tobacco. Income taxes were unconstitutional, business in general was virtually untaxed. But 31 pregnant words were added to the Constitution in 1913* and, because of the exigencies of War, the new income tax, personal and corporate, became the pillar of the Treasury. War-time taxation w?as regarded as temporary and when rates settled down at relatively high levels in the 19203, their sting was dulled by easy money. In Depression there was little income to tax. But when the bill for Recovery was finally presented, the Tax Collector suddenly emerged as stern, ubiquitous reality. Taxes had become, and were apparently to remain, a major item in the cost of doing business, a determining factor in the cost of living.

Recognition of taxation as a national problem of the first rank came from the Government at about the same time as from the taxpayer. Early in 1937 a famed authority on taxation, Columbia University's Roswell Magill, was made Under Secretary of the Treasury. Studies were promptly started. And then in a message to Congress last April President Roosevelt declared that there was "an immediate need for a careful survey of the present tax structure." One result of that call to action was the red-herring investigation of incorporated yachts during the battle over the Supreme Court and the subsequent plugging of a few yawning loopholes in the law.

But the serious work began last November when a House Ways & Means sub-committee headed by Congressman Fred Moore Vinson sat down to the enormously technical task of creating a Revenue Act of 1938. After nearly three months of daily toil in a confusion of charts, tables, statistics and court decisions, the subcommittee last fortnight presented a 100-page report, which will serve as the basis for a new tax law.

The 1938 Act will be the New Deal's fifth revenue measure but the first in which the dominant purpose is to improve the tax structure. All the others were heavily loaded with political or social motives, notably the 1936 Act (undistributed profits).

Mr. Vinson's subcommittee recommended 63 changes in the present tax law, most of them highly technical. It suggested repeal of some of the nuisance taxes, including levies on sporting goods, chewing gum, phonograph records and brewers' wort. It urged reduction of the tax on vegetable-oil seeds, including kapok seed, rape seed and sesame seed. It recommended fatter allowances for revenue agents for inter-island travel in the Hawaiian Islands. But the significant changes revolved largely around the undistributed profits tax.

Corporate. Confronted with a loud demand for immediate action on the profits tax when it set to work last autumn, the subcommittee resolutely turned its face against a retroactive measure which would affect 1937 returns. It felt that a hurried job would be inadequate, that an inadequate job near the end of the tax year would be worse for business than the taxes themselves. Upshot was a recommendation, not for abolition of the tax as desired by most businessmen, but for extensive modification. The principle would be preserved, but in most cases the tax itself would amount to little more than a face-saving device.

The general idea would be to levy a single corporate income tax, combining both the present normal tax with a profits tax. As usual, there would be innumerable exceptions, the most important of which would be banks, insurance companies and so-called mutual investment companies. These would pay a flat 16% tax. All other corporations would be divided into three classes or "baskets" and treated in three different ways.

First Basket: Little corporations earning $25,000 or less would be exempt from the profits tax. They would pay only a graduated income tax of from 12 1/2% to 16%, slightly higher than the present normal tax of 8% to 15%.

Second Basket: Corporations earning more than $25,000, and not closely held, would pay a 20% income tax, with credits up to 4% for profits paid out in dividends. This amounts to a 16% normal income tax with a 4% undistributed profits tax. Thus a corporation distributing all, half or none of its profits would pay respectively 16%, 18%, or 20%. The theory of this change is that while corporations would still have a definite tax incentive to pay out earnings, they could retain money for expansion at a cost of only 4%--open market rates.

Third Basket: Closely-held corporations earning more than $50,000 would be subject to an additional surtax. By elaborate definition a corporation would be "closely held" if a family owned 50% of its stock or two unrelated persons owned 53%, three persons owned 56%, and so on up to ten persons owning 75%. The surtax would apply only if a closely-held corporation failed to distribute less than 60% of its profits. And while the rate would be 20%, the surtax would be figured on a different base with a number of heavy credits. In most cases the surtax and income tax together would work out at less than the highest effective rate at present-- 32.4%*

Another modification applying to the second and third baskets would be that one year's operating loss might be carried over to the next year but only as a credit against the 4% profits tax--a concession to the argument that the present law prevents companies from rebuilding surpluses after lean years.

Witnesses who appeared before the Ways & Means Committee last week were mostly pleased but unsatisfied. They argued that the revisions did not go far enough, that the principle of the profits tax as well as the tax itself should be safely buried forever. Typical was one witness's remark: "Nothing short of repeal, we think, will give business the confidence it needs."

Individual. Second in unpopularity only to the undistributed profits tax on corporations is the capital gains tax on individuals (no New Deal measure). However, the Vinson Committee decided to retain it with a slight modification. The two major changes:

Segregation of long-term and short-term capital gains and losses would be required in calculating both carryover and current returns. In other words, short-term losses might be applied to short-term gains, but not to long-term gains or vice versa.

The Percentage Table for calculating the proportion of a gain or loss to be used for tax purposes would be graduated by months instead of years. Thus, at present, a capital gain on an asset held less than a year is 100% taxable income, but of a capital gain on an asset held for a year and a day only 80% is taxable income. So people are encouraged to hold securities until the next bracket is reached. The new table would step down 2% per month from 13 months to 25 months, after that at 1% so that a capital gain on an asset held less than a year would still be 100% taxable; if held 13 months and a day, 98% taxable; if held 14 months and a day, 96%, etc.

Tax-Makers. The U. S. Constitution provides that all revenue measures shall originate in the House. Only a handful of Representatives, however, can even understand much less originate a tax bill, for the Federal tax structure has grown so complicated that Congress has practically to turn it over to a small professional group of mathematical and legal wizards.

Leading Congressional tax authority is Representative Fred Vinson, a 48-year-old statistically-minded Kentuckian who has made taxation his legislative hobby. He is the driving force behind the new bill but it will be his last, for President Roosevelt has rewarded him with a $12,500 seat on the District of Columbia Court of Appeals.

The man who actually drafts the Congress' masterpieces of unintelligible taxation is the legislative counsel to the House of Representatives, Middleton Beaman. A shy, caustic genius, he has spent two decades trying to keep one jump ahead of the collective brains of the nation's ablest tax lawyers. Between Drafter Beaman and the lay members of the inner circle stands another wizard. Tax Expert Lovell H. Parker, chief of staff to the Joint Committee on Internal Revenue Taxation. Wizard Parker has the all important job of calculating how much revenue a tax will yield, whom it will affect and how. Great is the respect in which the average Congressman holds him, for besides being a lawyer he used to be a contractor, knows what it means to meet a weekly payroll.

Only other officials who speak the same language as Messrs. Vinson, Beaman & Parker are the Treasury's tax experts. Most of them are better versed in the application of their recondite science than in its theory. But it so happens that the man who knows more about the theory of Federal taxation than anyone in Washington is Under Secretary of the Treasury Roswell Foster Magill. And the new tax bill is at least his stepchild if not his own baby.

Tory's Son. Oddest fact about the New Deal's No. 2 Fiscal officer is that his father is President Hugh Magill of the American Federation of Investors, a pressure group with a thoroughly Tory orientation. In his younger days Father Magill was a liberal who supported the elder La Follette. When Son Roswell was born 42 years ago Father Magill was the high-school principal in Auburn, Ill.

Young Roswell was sent to Dartmouth (Class of 1916) where he was a shark at mathematics and a promising undergraduate journalist. After graduation he went to the University of Chicago's Law School, where he met and married Katherine Biggins. She finished law school with him and was admitted to the bar but instead of practicing became the mother of two small Magills.

Roswell Magill's regular occupation is teaching. After a year's apprenticeship in a Chicago law firm, he took on an instructorship at the University of Chicago, and after a brief interlude as a Government revenue attorney moved to Columbia in 1924. A pioneer investigator of Federal taxation and the author of several standard textbooks, he is a recognized authority on how to avoid taxes as well as how to levy them. Yet with all Roswell Magill's professorial background Congressmen like and trust him. Once when he appeared before a committee the Congressmen were so impressed by his learning that they asked whether they should not address him as "Doctor."' Said the Under Secretary, smiling: "Mister Magill. please."

Tax Man. Eventually, Mr. Magill would like to see the U. S. tax structure meet the three tests he has set up for the ideal system--adequacy, simplicity and fairness. He can demonstrate with overwhelming clarity that the present system fails on all counts. The new tax bill is to him merely a first step in the right direction.

After Drafter Beaman has whipped the bill into properly unintelligible shape, it will probably pass the House without major changes. But in the Senate, which is more self-willed, it will doubtless have rougher sledding. At some point it is almost certain to be attacked with at least three objectives: 1) higher profits tax exemptions, 2) wider revisions in the capital gains tax, and 3) abolition or modification of the "third basket" for closely-held corporations.

Tax reformer though he is, Roswell Magill is no visionary. He knows that a broadening of the personal income tax base is a crying need but he also knows that an election year is no time to propound it. In a masterly official statement as the Ways & Means Committee's first witness, he outlined other tax evils which he proposes to tackle in future bills, such things as tax exempt securities, overlapping of State and Federal taxes, elimination of the remaining nuisance taxes, simplification of tax procedure. One Magill reform already in effect on the 1937 income tax blanks is the position of the affidavit on the back instead of the front where nosy notaries have been able to see the figures.

*The 16th Amendment: "The Congress shall have the power to lay and collect taxes on incomes, from whatever sources derived, without apportionment among the several States and without regard to any census or enumeration."

*One interesting provision: Under certain conditions the surtax on a closely-held company would be waived if its stockholders agreed to report their pro rata share of its undistributed profits as part of their personal income.

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