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Z-549
STATMENT OF MAREIKER S. ECCLES
PRESETTED BEFORE
WAYS AND MEANS COWiITTEE
May 7, 1941

Mr. Chairman and members of the Committee:

When I was advised of

the Committee1s request that I appear here today, I undertook to prepare as
briefly as possible a general statement of my views on the vitally important
tax program which you are engaged in formulating.

I would appreciate an

opportunity to read the,statement first, and then to answer such questions as
you may wish to ask.

In what I have to say on this subject, I speak only for

myself and not for the Board of Governors of the Federal Reserve System*
At the outset I desire to say that I am fully in accord with the
proposal of the Secretary of the Treasury that $5.5 billions of revenue needed
for defense be raised from taxation.

Likewise, I agree with the objectives

of taxation policy set forth by the Secretary when he appeared before this
Committee.

As' he stated then, the purpose is to design our tax program, first,

so that we may pay as we go for a reasonable proportion of our expenditures;
secondly, so that all sections of the people shall bear their fair share of
the burden; third, so that our resources may be mobilized for defense while
reducing the amount of money that the public can spend for comparatively less
important things; and finally, so that a general rise in prices may be avoided
by keeping the total volume of monetary purchasing power from outrunning
production.
As a nation wu cannot get rich by devoting a large part of our
energies ana resources to producing the things of war instead of the things of
peace.

Our standard of living must inevitably suffer.




That entails sacri-

3-549

fices which should be borrie by all of us.

No group should be permitted to

profit out of this great national emergency at the expense of other groups.
Taxation is the most important instrument of Government in bringing about an
equitable distribution of the costs of defense, in preventing profiteering and
price inflation.
We know that as the national income rises through defense expenditures,
the incomes of many corporations and individuals will be greatly increased.
Taxes should be levied in such a manner as to bring back to the Treasury as
much as possible of the Governments expenditures.

In keeping with democracy,

taxation for this purpose should be based on income and ability to pay.

Only

in this way can we avoid inflationary developments.
With such general principles we are all likely to agree readily
enough.

When it comes to applying the principles, as the members of this

Committee know from long experience, there are alxvays some groups that hope to
escape, or hope to shift their fair share of taxation to other groups.

In the

suggestions I have to make I have sought to apply these principles as fairly
and equitably as possible.
Thus, it is my belief that the first source of defense revenue should
be the corporation tax and the excess profits tax because, generally speaking,
corporations are the greatest beneficiaries, directly and indirectly, from
defense expenditures.

The proceeds accruing from the expanding national in-

come tend to become concentrated in the first instance in the possession of
business corporations*

The most certain way tp insure against inflation is

for the Government to levy on these earnings and divert the proceeds directly




Z-549
- 3 into the defense program before they are distributed into the general income
stream through higher wages and higher dividend payments.

If these surplus

funds are not thus collected in the first instance at the source, but are later
distributed through large wage increases and large dividend payments to the
community, it becomes necessary subsequently for the Governmant to abstract excess incomes through the personal income tax, excise taxes, and ether forms of
mass taxation.

The problem is not avoided, but only delayed and made more

difficult by failure to tap the profits at the source.
High taxation of personal income and excise taxation will be
necessary in any event, but the amount needed from these sources will be reduced by a prior collection at the points where the profits originate, namely,
in the business units.

If excess profits are not tapped, they will lead to

demands for higher wages.

Apart from the question of equity and the problem

of allaying industrial unrest, is the question of going directly to the source
of tho increased flow of income and diverting it into the defense program before
it spreads out into the community and adds private mass purchasing power on
top of the Government's demands springing from the defense program.
With increased surtax rates, especially in the middle income
brackets, and in the absence of an undistributed profits tax, there will be a
tendency on the part of some corporations to hold back disbursements of dividends.

This is a further reason for heavy normal and excess profits taxes on

corporations.
After we have strengthened our corporation taxes to collect a substantial part of the increased .national income at its point of origin, we should




Z-549
- 4

rely predominantly on the individual income tax and on estate and gift taxes
to meet most of our remaining revenue requirements.
the established principle of ability to pay.

These taxes are based on

The normal tax and surtaxes on

individual incomes nave been moderate, compared with other countries, except
in the very highest income groups.
creased.

They can and must be substantially in-

With expanding employment and payrolls resulting from defense ex-

penditures, it is equitable and necessary that some of the benefits be recovered by the Treasury.

Exemptions should be reduced, thereby spreading the

base and increasing the number of income taxpayers.

This is a more direct and

equitable way of raising revenue from the lower income groups than by
imposition of indirect excise and sales taxes.
To the extent that prices are controlled and wages are then increased, corporation profits, subject to the excess profits tax, are less than
they would be otherwise.

Federal revenue from this highly productive source

would bo accordingly diminished, and the Government would, in effect, be paying most of the wage increase. Under these circumstances, it is necessary for
the Government to recover some of this loss of revenue.

This can be done by

broadening the individual income tax base and increasing the rates.
I am opposed to a general sales tax, or to an increase or imposition
of excise taxes except where it is necessary to curtail civilian demand for
products needed in defense, thus preventing inflation.
Sales taxes may have been appropriate in poverty-stricken countries
of the Old World where governments must extract revenue from their citizens
in any fashion that is expedient.




They are not appropriate taxes in this

Z-549
- 5 -

country where other sources of revenue are ample and the people are prepared
to support an equitable tax program by the payment of direct taxes.

Consumer

expenditure can be restrained either by an increase in income tax, or by a
tax on articles of mass consumption.

The difference lies in the fact that the

individual income tax does this frankly, directly and on the basis of ability
to pay. A tax on articles of mass consumption does it indirectly and in a
manner that makes the tax proportionately heaviest on those least able to pay.
Indirect taxation is taxation by autocracies, income taxation is democratic
taxation.
Our existing tax structure is already heavily weighted with regressive taxes.

According to the estimates furnished to this Committee by

earlier witnesses, the income group below $500 paid 22 per cent of its income
in taxes of all sorts in 1938-39, while those groups with incomes of from
$500 to $10,000 averaged approximately 18 per cent.

Inasmuch as increases in

individual income tax rates will curtail purchase of luxury and semi-luxury
goods, it is not advisable at this time to impose further sales taxes on such
articles in the interest of defense.
The only appropriate role for further excise taxes in our present
economic situation consists in limiting the civilian demand for durable goods
competing with defense.
Selective sales taxes, which would have the effect of reducing demand for such products as automobiles and other articles that compete with
defense production for materials, man power or plant facilities, are justifiable
and necessary at this time.




Such selective taxes, by curbing demand in specific

Z-549
- 6 fields, will release facilities needed for defense production.

Sales taxes on

foodstuffs, clothing and other necessaries of which we have surpluses are
entirely unwarranted, however. They would tend to throw out of work in various
localities men who could not be absorbed into defense industries, or to make
idle facilities that are not needed for defense.
While I am, therefore, in general agreement with the Treasury's
program both in its aggregate amount and in the general type of taxation it
provides, I wish to suggest certain changes in emphasis with respect to the
sources of revenue on which it draws. Accordingly, I should like to describe
in some detail the changes that I believe would more nearly realise the
objectives which I have set forth.
I.

Excess Profits Tax
In my opinion an effective excess profits tax is the keystone of a

well balanced tax program.

Any tax program will have to include a substantial

increase in the rates of taxation for corporate incomes in general and for
individual incomes.

You should not impose increased taxes on the great numbers

of business concerns of small and moderate size and on millions of individual
taxpayers until you have given them every reasonable assurance that the funds
they are being asked to provide will not go to swell the excessive profits of
some corporations.
The excess profits tax now o l the statute books does not give any
i
such assurance.

If you allow the idea to take root in the public M n d that

through these vast expenditures a few are being made rich and a few who are already rich considerably richer, the result is bound to endanger the success of




Z-549
- 7 our defense effort.

In order to prevent an inflationary spiral of price and

wage increases, labor should be willing to moderate its demands for increased
wages, but labor cannot be expected to follow such a course if employers are
permitted to retain excessive profits.
The Treasury has suggested that an additional $400 millions of revenue
be obtained by amending the excess profits tax.

I believe #800 millions to #1

billion of additional revenue can and should be obtained from this source.

The

revenue-yielding potentialities of an excess profits tax were well demonstrated
by our own experience during the World War.

The present statute could be made

to realize those revenue potentialities by changes in a few important respects.
I shall mention three.
1.

Restrict the use of the income method of computing the excess

profits credit, either by reducing the 95 per cent of past average earnings now
allowable to 75 per cent, or by any other method that may recommend itself to
the Committee.

I agree with Mr. Sullivan's view that all excessive profits, as

well as profits directly or indirectly attributable to the defense program,
should be subject to special taxation.
2.

Increase sharply the rates now applicable to excess profits.

In

the light of the maximum 80 per cent rate in force in this country during the
last World War, a maximum rate of 75 per cent is not too high.

It is also

important that the tax brackets used in the present law be revised.

I recognize

the strength of the arguments for graduating the rates according to the percentage
of excess profits to invested capital, the method used at the time of the World
War, but if the present method is continued, there is no reason why the maximum
rate should not apply to excess profits at a very m\ich lower level than $500,000.
A corporation with this amount of excess profits cannot fairly claim favored
treatment as a small enterprise.



Z-549
- 8 -

3. Reduce the rate of return allowed under the invested-eapital
method of computing the excess profits credit from the present figure of 8
per cent to 6 per cent.
the World War.

The figure of 8 per cent was used during the days of

The rate of return that investors could reasonably hope to

realize on investment in securities has been materially reduced since that
time.

We should make a similar adjustment in our ideas About an appropriate

rate of return on equity capital.
II.

Surtax on Corporation Income
If the excess profits tax is revised along the lines I have just

indicated, it will then be fair and reasonable to ask American corporate enterprise as a whole to pay the surtax on corporate net income which the Treasury
proposes.

The argument for enacting a surtax, instead of raising the rate of

the corporation normal tax, seems to mo to be clear and convincing.

Since we

have now stopped issuing tax-exempt Federal securities, there is no reason why
we should confer additional tax benefits upon holders of outstanding securities
by further increasing the normal corporation income tax rate.
III.

Individual Income Tax
If the tax principles to which most of us adhere are to be effectively

implemented, a substantial increase in the individual income tax must play a
major part in the tax program now undergoing formulation.

I am in accord with

the view that the present normal tax and the present earned incomc credit be retained, and I agree also with the proposal that the present $4,000 surtax exemption be abolished.

I have felt, however, that the Treasury1 s suggested sur-

tax rates impose too abrupt an increase on the middle brackets of individual




Z-549
- 9 -

incomes.

I should recommend, instead, a somewhat less drastic revision in the

surtax schedule, combined with a reduction in the married persons' exemption to
$1,500 and in the credit for dependents to $300.

I should like to leave with

the Committee a detailed schedule of rates which I have had prepared along
these lines.

No additional defense tax would be superimposed on the tax re-

sulting from the application of these rates.

According to our estimates the

changes in rates and in exemptions which I propose would yield $1.2 billions
of additional revenue.
The middle income groups include many salaried people and others
living on relatively fixed incomes who v/ould be especially hard hit by even a
small rise in the cost of living.

Too drastic an increase in their tax bill would

necessitate many difficult and painful readjustments which it would seem unwise
to impose suddenly*

It is for this reason tfc&t I urge some modification cf the

Treasury's proposed rates in this r^ngo of incomes.
At the same time, I attach great importance to the changes in the
married persons1 exemption and credit for dependents rhich I have proposed*
Without s , i such broadening of the individual income tux base, this tax cannot
oTe
perfona its full job in financing defonsot

An important segment of the national

income, including the incones of nany skilled workers who are receiving substantial wage increases as a result of the defense prograa, is now excluded
from the individual income tax base. Unless we tax the incomes of the betterpaid wage earners through progressive taxation, we may be unable to resist the
pressure for taxing such incomes and our very lowest income groups as well,
through the inequitable, shot-gun method of a sales tax.




Any tax program which

Z-549
- 10 -

failed to include such a broadening of our tax base would be unbalanced.
Should more revenue be required in the future, a further broadening of the income
tax base would be preferable to additional sales taxes.
IV.

Estate and Gift Taxes
The strengthening of estate and gift taxes is one of the most needed

reforms in our whole tax structure.

In a message to Congress in June 1935, the

President said:
"The transmission from generation to generation of vast
fortunes by will, inheritance or gift, is not consistent with
the ideals and sentiments of the American people. Such.inherited economic power is as inconsistent with the ideals of
this generation as inherited political power was inconsistent
with the ideals of the generation which established our
government.r?
The task, begun in the Revenue Act of 1935, of bringing law into conformity with
our American ideals should be completed now.
For this reason I em thoroughly in accord with the Treasury proposals,
but for this reason I believe also that we should go a great deal farther.

Even

a lowering of exemptions and a considerable increase in the rates of estate and
gift taxation are only a part of the task. The avenues for tax avoidance are
both broad and numerous under our existing system of estate and gift taxes, and
so long as these avenues are allowed to remain open, the task of bringing transfers of wealth within the framework of a progressive tax structure will remain
incomplete.

A rather extensive redrafting of existing statutes is, therefore,

essential.
Since detailed recommendations on methods of closing existing loopholes can be furnished only by qualified legal experts, I shall merely indicate




Z-549
- 11 -

the general principles which, in my judgment, should guide the revision of our
estate and gift tax laws.

I think there is little disagreement regarding the

underlying purpose of estate and gift taxes.
wealth —

It is to subject the passage of

from individual to individual and from generation to generation —

an effective system of taxation at graduated rates.

to

The amount of tax ought

not to depend in any significant degree upon the form in which wealth is
transmitted —

whether directly or through life insurance or through tax-

avoidance trusts —

nor upon the time of transfer —

whether during life or at

death. The following proposals are presented with these considerations in mind:
1.

For the present exemptions of $40,000 under the gift tax,
$40,000 under the estate tax and an additional $40,000 for
life insurance — a total of $120,000 — there should be
substituted a single, consolidated exemption of #40,000
applicable to the sum of gifts and estate, including insurance proceeds.

2.

Because the gift tax schedule is 75 per cent of the
corresponding estate tax rates, many people have inferred
that the net saving through transfers by gift is only 25
per cent. This inference is incorrect. At present tax
liability at the highest estate tax rates to which an
estate would be subject can be avoided by incurring tax
liability at the lowest gift tax rates. This type of
avoidance can be presented only by combining gift and
estate taxes into a single tax on transfers of wealth.
I prefer to leave to lawyers the explanation of the
several possible methods of effecting such a consolidation.
If consolidation were effected the taxpayer would be free
to choose how much of his property to dispose of during
life and how much at death, but his tax liability would
not be influenced by his decision. Until this step is
taken, the opportunity to save a great deal on estate tax
by payment of a small gift tax will remain open.

3.

Under existing statutes estate and gift taxes can frequently
be either entirely avoided or substantially reduced through
the use of various devices involving long-term trusts. This
avenue of avoidance should be closed, so that the estate tax
may reach all transfers of property from one generation to
another.




Z-549
- 12 V.

Consumer Taxes
For the reasons previously indicated, excise taxes should be imposed

only on consumers1 durable goods. The rates should be substantial and should
be fixed to achieve the required degree of curtailment in civilian demand.

Al-

though revenue should not be the primary consideration in fixing the level of
rates, the revenue obtained from this source will be large.

Adequately high

rates on this range of goods should yield close to one billion dollars.
A large part of this revenue can be obtained through taxation of automobiles alone.

The automobile industry has already committed itself to cur-

tailing production by 20 per cent in its next model year, at a time when the
national income, and the civilian demand for new cars, are rising rapidly.
rise in prices of considerable magnitude is in prospect.

A

The Government should

take a much greater share of the increased price people will be paying for both
new and used automobiles than the Treasury proposes, A tax of 20 per cent on
all automobile sales would be more appropriate than the suggested rate of 7 per
cent on new cars only.
Increase in the tax on gasoline and other commodities that are in
abundant supply will make no significant contribution to our defense effort.
The proposed check tax is another case in point.

Checks, rather than currency,

are used to settle some 80 per cent of our total transactions.

There is no

more reason to tax checks than currency j)ayments. For many it will be a simple
matter to avoid the tax by using currency instead of checks.

Depositors of

small means, already subject to bank service charges, will be the group most
likely to avoid the tax in this v/ay, but they will thus be deprived of a safe
and convenient way of making money payments, as well as a record of receipts




Z-549
- 13 -

and payments.

The tax will not come out of bank earnings, but will be charged

to the individual accounts.
VI.

Revenue Yield
The following table, which I ask permission to insert in the record,

summarizes the yields from various revenue sources under the suggestions I have
made.

There is no significant difference between the aggregate yield of this

program and the Treasury proposals.




Z—549

(Yield in millions of dollars)
i
*
i

Source

Corporation incmes:
Excess profits tax (lower credits,
raise rates)
Surtax as proposed by Treasury

Yield

900
534

Individual incomes:
Increase in surtax rates, reduction of
married person's exemption and credit
for dependents

1,200

Estates and gifts (close loopholes, raise
500
rates)
950
Excise taxes, primarily on durable goods
4,084
Lesss




Loss
to
Loss
to

Gross yield
of excess profits revenue due
surtax on corporate income
of individual income taxes due
increases in corporation taxes
Net yield

300
150

450
3,634

Z-549

- 15 -

EXISTING AND PROPOSED SURTAX RATES

Surtax net income
, (fooo)
0 to
1 to
2 to
4 to
6 to
8 to
10 to
12 to
14 to
16 to
18 to
20 to
22 to
26 to
32 to
38 to
44 to
50 to
60 to
70 to
80 to
90 to
100 to
150 to
200 to
250 to
300 to
400 to
500 to
750 to
1,000 to
2.000 to
5,000 and




1
2
4
6
8
10
12
14
16
18
20
22
26
32
38
44
50
60
70
80
90
100
150
200
250
300
400
500
750
1,000
2,000
5,000
over

Proposed
Existing
1
1
Rate
Total surtax 1
Rate
Total surtax
1
(per cent) *on upper limit
(per cent) 1on upper limit
0
0
0
4
6
8
10
12
15
18
21
24
27
30
33
36
40
44
47
50
53
56
58
60
62
64
66
68
70
72
73
74
75

0
0
0
80
200
360
560
800
1,100
1,460
1,880
2,360
3,440
5,240
7,220
9,380
11,780
16,180
20,880
25,880
31,180
36,780
65,780
95,780
126,780
158,780
224',780
292,780
467,780
647,780
1,377,780
3,597,780

4
6
10
14
18
21
24
27
29
31
33
35
38
43
47
51
54
58
61
64
66
67
69
70
71
71
72
73
74
74
75
76
76

40
100
300
580
940
1,360
1,840
2,380
2,960
3,580
4,240
4,940
6,460
9,040
11,860
14,920
18,160
23,960
30,060
36,460
43,060
49,760
84,260
119,260
154,760
190,260
262,260
335,260
520,260
705,260
1,455,260
3,735,260

-

INCOME TAX:

16

.

2-549

COMPARISON OF PRESENT AND PROPOSED INDIVIDUAL INCOME TAXES

ON NET INCOMES OF SELECTED SIZES; MARRIED PERSON, NO DEPENDENTS

(Maximum earned income credit)

Net income1

before
personal
exemption

!

i/

Amount of tax iJ
1
1

$2,000
2,500
3,000
4,000
5,000
6,000
8,000
10,000
12,500
15,000
20,000
25,000
50,000
75,000
100,000
500,000
1,000,000
5,000,000

1/

1

1
Present 1
law
* Treasury*

0
$11
31
70
110
150
317
528
858
1,258
2,336
3,843
14,126
27,768
43,476
330,156
717,584
3,916,548

0
$72
152
312
506
700
1,131
1,628
2,316
3,073
4,800
6,824
19,540
35,127
52,474
346,122
738,086
3,937,050

1

Stam

f

0
$44
97
202
352
502
889
1,364
2,013
2,853
4,756
7,055
20,794
36,689
54,124
347,598
739,598
3,938,598

/

y
Effective rates 1/
1
Present*Treas~f Stam !Eccles
Eccles 1 law % 1 ury %* % y %
$32
70
118
234
370
526
898
1,345
1,990
2,729
4,429
6,394
19,234
35,184
52,639
354,049
744,034
3,934,004

0.4
1.0
1.8
2.2
2.5
4.0
5.3
6.9
8.4
11.7
15.4
28.3
37.0
43.5
66.0
71.8
78.3

2.9
5,1
7.8
10.1
11.7
14.1
16.3
18.5
20.5
24.0
27.3
39.1
46.8
52.S
69.2
73.8
78.7

1.8
3.2
5.1
7.0
8.4
11.1
13.6
16.1
19.0
23.8
28.2
41.6
48,9
54.1
69,5
74.0
78.8

1.6
2.8
3.9
5.9
7.4
8.8
11.2
13.5
15.9
18.2
22.2
25.6
38.5
46.9
52.6
70.8
74.4
78.7

Under the Treasury and Stam proposals, the 10 per cent defense tax would be retained;
under the Eccles proposals it would be dropped.