What's Wrong With Taxes?

To give Congress expert advice for charting tax policies, the Joint Committee on the Economic Report early this year asked some 100 top industrialists, labor leaders and economists for their views. Last week, when the committee brought out its fat (930-page), figure-packed report, there were as many opinions as experts.

What Congress wanted most to know was how to design a tax policy that would promote production, full employment and purchasing power. Almost to a man, U.S. businessmen agreed that rising production is sorely hindered by present federal taxes. Though postwar investment in plants and equipment has soared to alltime records, American Cyanamid Co.'s Economist Ralph E. Burgess pointed out that 80% of the cash is to replace worn-out facilities. And mainly the hope for large capital gains in the boom has kept venture capital flowing steadily, said Harvard University Professor J. Keith Butters. "In a time of depression and investor pessimism" present tax laws might dry up these supplies altogether.

In no case, Butters added, should capital-gains taxes be raised without a compensating cut in high-bracket income taxes, lest investment incentive vanish. On the other hand, if the capital-gains tax were eliminated, New York Stock Exchange Research Director Jonathan Brown estimated that $200 billion in "locked in" capital, i.e., unrealized capital gains, would be liberated for new investment.

Caught in the Middle. One of the hardest-hit victims of present federal tax laws, said some tax experts, is the small businessman, who is big enough to pay the same tax rates as giant corporations, but too little to attract attention in the big-money markets. Thus he must rely on the small private investor, who is often scared off by too much risk for too little take-home profits. For example, if a shareholder lends the company money, it may be taxed as dividends when it is repaid. New York Lawyer Edwin S. Cohen suggested that the Government help small businessmen by permitting investors to deduct losses against ordinary income.

Such labor leaders as C.I.O. Research Director Stanley H. Ruttenberg plumped for income-tax cuts to beef up consumer buying. "Tax policies designed to grant an increasing degree of special privilege to business investment will not and cannot produce long-run economic growth and stability," said Ruttenberg. "What is required is not additional tax privileges for business and wealthy investors, but direct tax cuts for the great mass of taxpayers . . . This would result in expanding consumer markets that will make it profitable for business to invest in new and more efficient plant structures and machines . . . [and] absorb the increasing available output." University of Michigan Professor Richard A. Musgrave refuted the old saw that taxes that cut consumption are bad taxes. Said Musgrave: that proposition "holds for conditions of depression only." In 1955's fast-growing prosperity, "taxes which are highly deflationary may be an advantage."

Soak the Executive. Nobody offered any evidence that labor's rank and file duck overtime work to keep out of higher tax brackets, but many an industrialist feels that the up-to-87% bite out of top management salaries is harmful. "The effectiveness of the money incentive is being eroded by the tax rates in the upper brackets," said Crawford H. Greenewalt, president of E. I. duPont de Nemours & Co.; "there are signs among the younger men that promotion is a little less attractive than it used to be ... When a promising young business executive decides that he won't try for the $64,000 question, when he decides that he isn't interested in becoming production manager because the increased net just isn't worth the extra effort and strain, then everyone is the loser."

Despite the general gloom over taxes, there were bright spots for some. University of Chicago Economist D. Gale Johnson discussed the case of the U.S. farmer: "Personal income tax does not apply to nonmoney income," and farmers have more nonmoney income, e.g., meat, eggs, vegetables, etc., than any other group.

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