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BOARD DF GOVERNORS FEDERAL RESERVE SYSTEM Office Correspondence To. fihairman Bodes From Ei chard A. Fusgrave Date Subject: February 12t l<?li7 levenue Income Tax Reductions Alfred S. Sherrard The attached table shows present and reduced income tax liabilities for selected levels of net income resulting from various methods of tax reduction, as follows * Knutsong Flat reduction in present liability by 20 per cent for first 250,000 dollars of tax liability and 10 per cent thereafter. Plan At Reduction in first bracket rate from 20 per cent to 12 per cent without change in exemptions* Plan B t Increase in present exemptions of 500 dollars per person to 750 dollars, without rate changes. Plan Ct Credit of 50 dollars per exemption against tax liability tinder present exemptions and rates* Aliens Graduated reduction in liability ranging from 20 per cent for taxable incomes up to #2,500 to 10 per cent for incomes over #10,000. With the exception of the Allen plan, each proposal would reduce income tax yield by approximately 3*5 billion from the estimated level under present law of 18 billion. Allan estimates his plan to cost about 2.8 billion, but this seems on the low side* The Knutson, Allen and A plans would leave the number of taxpayers unchanged, while plans B and C would result in some reduction. Estimatedffumberof Returns ( in millions of dollars) Present law Enutson Plan A Plan B Plan C Allen Taxable Eon-Taxable 37 37 37 26 26 37 11 11 11 18 22 11 Total kfi kB kB UU kB Tot Chairman Eccles - 2 - Under plan B where there would be a reduction in filing requirements, total returns as well as taxable returns would be reduced although nontaxable returns would show some increase« Under plan C where an increase in filing requirements would not be feasible, taxable returns only would be cut* With respect to the distribution of tax relief by income groups, the table shows that the Knutson plan is by far the most favorable to high income recipients* The Allen plan is the same for low net incomes, but thereafter the reduction is less* On the whole, the Allan plan still emphasizes reductions in the upper income groups* Plans A, B and C are rather similar as far as distribution is concerned, reductions in all cases being most significant in the low income groups and negligible for large incomes* Because of the greater reduction in the number of returns and for administrative reasons, plan B appears preferable* Attachment Alternative Flans for Reducing Personal Income Tax Yield ^y Billion Dollars (Head of family, 1 dependent) Selected Levels of Net Income before Exemption Present Lm/W Tax Plans Enutson A Alle3 / B (Proposed Liability) 1,600 2,000 3,000 4,000 5,000 10,000 20,000 50,000 100,000 200,000 500,000 19 95 285 485 694 2,024 6,11(2 24,453 62,714 147,697 407,032 15 76 228 388 555 1,619 4,914 19,562 50,171 118,158 341,687 11 57 171 333 5*42 1,872 5,990 24,301 62,562 147,545 1406,880 — — mm mm —— 143 135 333 335 523 544 1,791 1,874 5,771 5,992 23,9liO 2^,303 62,09k 62,564 H+7,055 147,547 4o6,384 406,882 76 228 388 561 1,685 5,368 21,848 56,282 132,767 366,169 (Reduction from Present Liability) 1,600 2,000 3,000 4,000 5,000 10,000 20,000 50,000 100,000 200,000 500,000 mum — — — — — — — — h 19 57 97 139 405 1,228 4,891 12,543 29,539 65,345 8 38 114 152 152 152 152 152 152 152 152 1( Revenue loss of only 2,750 million dollars 19 95 li|2 152 171 233 371 513 620 642 648 19 95 150 150 150 150 150 150 150 150 150 4 19 57 97 133 339 774 2,605 6,432 14,930 40,863
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