No Agreement

The phrase "tax reduction" is not a controversial issue. It is safe to say that every single Senator and Representative would answer loudly, "Yes," if asked whether he favored it. The public response has been so unanimous that it would be worth the political life of any Congressman to oppose it.

And yet the three groups--Democrats, regular Republicans and Republican insurgents--are almost certain to hold a fierce encounter over the tax reduction bill. Each of the three groups is likely to have a separate bill.

In the first place, there is the proposal that there be a bonus and a partial tax reduction. The Republican insurgents and a good proportion of the regulars of both parties favor this proposal, and there is no doubt that it will break party lines. The success of this proposal will depend entirely on whether a bonus bill can be passed-- and that hinges on two or three votes one way or another to pass or defeat passage of a bonus over the President's assumed veto.

The second source of discord will be Secretary Mellon's proposal to decrease income surtaxes to a maximum of 25%. This proposal will be stoutly opposed by the Republican insurgents and by the greater part of the Democrats. The defection of the insurgents will leave the regular Republicans without power to pass this part of the proposal in either house. A certain number of the conservative Democrats from the Eastern states will, however, join with the regular Republicans. In this number are Senators Bruce (Md.), Glass (Va.), Edwards (N. J.), Walsh (Mass.). But there must be from four to six more of their kind in the Senate, if the surtaxes are to be reduced. In the House the situation is equally dubious.

The Argued Point.

"No tax reduction for the millionaires!" is the rallying cry of the Republican insurgents and most Democrats. This argument is presented by Representative Garner, of Texas, Democratic whip and member of the Ways and Means Committee, in the following words:

"The Mellon plan, when stripped of its minor provisions, only offers substantial tax relief to the 525,000 individual income surtax payers. I make this statement because Congress could repeal the entire income taxes of the 6,136,000 individuals with incomes of $5,000 or less, which would involve a revenue loss of only $92,790,000, thereby leaving the 525,000 large income surtax payers as the chief beneficiaries of the Mellon income tax recommendations. Dealing with the reduction of surtaxes on these 525,000 incomes in America constitutes the head and front of the Mellon income tax proposals."

The answer of those who advocate lowering the surtaxes is that the Mellon plan actually proposes to get more money out of the very rich. Those with incomes of $100,000 and over will profit in three ways by the Mellon plan:

1) Reduction of normal tax .........$3,200,000

2) Reduction of tax on earned

incomes ........375,000

3) Reduction of surtaxes .............48,700,000

Total ..............$52,275,000

The same group will also lose in three ways:

1) Limiting deductions for capital

losses to 12 1/2% .........$20,000,000

2) Limiting deductions for interest paid* ...........25,000,000

3) Requiring a single return for husbands and wives ..........1,500,000

Total ............$46,500,000

This leaves a net reduction of taxation for these rich people of only $5,775,000--but even this reduction does not stand. With surtaxes reduced to a maximum of 25%, it will be more profitable for these people to withdraw their money from tax exempt securities (having a low yield) and place it in taxable securities with a high yield. It is estimated that $54,000,000,000 (one-fifth) of the nation's wealth is invested in these tax free securities, held in large part by these people. With part of this invested in properties whose income is taxable the Government should actually get more in taxes from the very rich than it now does.

*Limitation of deductions from gross income for interest paid and for losses of a nonbusiness character to the amount that these items exceed tax exempt income. It was the practice of the very rich to borrow money and invest it in tax exempt securities; thus they could deduct the interest from their net taxable income and also get untaxable profits from their investments. This was made illegal by the Act of 1921. The law is still easily evaded, however, because it is possible for a man to invest his regular income and borrow for his living expenses and other purposes--thereby gaining the same end.