Major tax reform: Urgent necessity or not? (1973) | ARCHIVES

Major tax reform: Urgent necessity or not? (1973) | ARCHIVES


Announcer: From the Nation’s Capital, “Washington
Debates for the ’70s.” A series of programs designed to bring together
for an open exchange of views and opinions outstanding authorities on vital issues facing
the world of the ’70s. The topic: “Major Tax Reform: Urgent Necessity
or Not?” Now, here is Peter Hackes. Peter: Ever since the bygone days of British
taxation without representation, which, as you may recall, was one of the major reasons
for the American Revolution, taxes have been the subject of keen dispute in this country. Periodically, often for political reasons,
leaders of one group or another launch a campaign to revise the American tax system. Just such an outcry is being heard across
the nation today. But what kind of tax changes should there
be? Which groups of taxpayers should reap the
benefits? Those at the top income scale who pay the
most, the ones in the lowest income brackets, or those of us in the middle, who are finding
the tax burden increasingly an overwhelming one? Should tax revision, or tax reform as the
revisionists call it, be selective? Should it include, for instance, changes in
the taxes that corporations pay? Or as some reformers ask, should it be a tax
change across the board hitting every segment of the nation’s economy? Should the changes come only in the form of
reductions? Or should tax increases be included in the
changes? It takes a lot of money in this inflated society
of ours to pay for all the things we want and expect the government to do for us with
our tax money. Welcome to another in the series of rational
debate seminars presented by the American Enterprise Institute. A nonprofit, nonpartisan research and education
organization. Our subject is “Major Tax Reform: Urgent Necessity
or Not?” Our debaters today are Charls Walker, a former
top-level administration fiscal expert, and Henry Reuss, a long-time member of Congress
and a leading economic expert on Capitol Hill. Also with us here at the American Enterprise
Institute are many other experts in the field of taxation, men and women engaged in making
public policy, teaching, writing on the subject of the pros and cons of the American tax system. Later in the program, they’ll be asked for
their comments and they’ll question our debaters. Now to present our discussion, a veteran Washington
correspondent for NBC News, Robert Goralski. Robert: We’re most fortunate to have with
us this evening as our first speaker former Deputy Secretary of the Treasury, Charls E.
Walker. He served in that high policy position for
four years. Dr. Walker is a native of Texas, he’s graduated
from the University of Texas, later was awarded his Doctorates Degree in Economics from the
University of Pennsylvania. He’s taught economics, served as an economist
with the Federal Reserve Bank and with commercial banking institutions. Dr. Walker now heads his own Washington-based
consulting firm. For his view on our debate topic on major
tax reform, it’s a pleasure to present Dr. Charls E. Walker. Dr. Walker: Well, thank you very much, I wish
you had mentioned the address and phone number of my Washington consulting firm, but I understand
that commercials are out for this purpose. Let me start with my main conclusion, and
I will conclude with a sub-conclusion that I think is perhaps more important than my
main conclusion. I believe very strongly that the federal income
tax system is basically a fair and effective system. I also believe that as a result of the Tax
Reform Act of 1969, and the Revenue Act of ’71 legislation, which I had the privilege
to manage in the Congress for President Nixon, that as a result, we have a much better system
today than we had only four years ago. What we really need is to ask whether our
system is biased against investment in favor of consumption, I think it is. And rather than further increase that bias
as I think my opponent would want to do, I think we should reduce that bias. I think I can best make my case for Congressman
Reuss to comment upon by trying to separate fact from fiction, myths from realities, with
respect to recent discussion of the federal income tax system, particularly those you
heard from about January 1972, until the election was ending. Let’s start with myth number one. This is that rich people get away with murder
when it comes to paying federal income taxes, now what’s the reality? What’s the truth to this? This myth seems to have grown out of the disclosure
by Congressman Reuss some months ago of what I think were misleading and incomplete data
indicating that some 110 or so individuals with more than $200,000 in adjusted gross
income…that’s a figure you see on your tax return, paid no federal income taxes in 1970. Well, the first point to note is that back
in ’65, ’66, before I came to town or President Nixon came to town, that figure was in the
range of 300 to 400 people. So 110 might look to be pretty good progress
in getting rich people to pay taxes. But the second point to note is that the figures
that Congressman Reuss announced were from unaudited income tax returns. And anyone who has tangled with an income
tax auditor knows that what you file may not well be what you actually pay. And as the audit process has taken place,
the number of non-taxpayers has dropped sharply and now stands…I am told by the Treasury,
at about 85 people. And as that process continues, it will drop
one return, a fella showed, I think, about $400,000 in gambling income and $400,000 in
gambling losses, a very happy coincidence. But I’m not sure he can demonstrate that to
the satisfaction of the tax auditor. Furthermore, the Tax Reform Act of ’69 was
staged in and did not have time to have its full impact before these ’70 flash returns
came in. Stated differently, the Tax Reform Act, I
think, ’69 Act is proving to be highly effective through the minimum income tax and other measures
in reducing the number of rich people who pay no income taxes. But…and I say this especially to the press
in the room, the most under-reported aspect of this whole matter has been the number of
rich people with more than $200,000 income who did pay taxes. There were 15,200 of those versus the 85 or
less who didn’t, that’s 99% plus, and they paid an average of $177,000 per person, an
effective rate of 44% on adjusted gross income, and 60% on taxable income. Rich people do pay taxes and they pay through
the nose. Let me move on to myth number two. Myth number two, the Tax Reform Act of 1969,
it is said…and the Revenue Act of 1971, it is said, provided a bonanza to business
and the rich while increasing taxes on the working man, you heard a lot about that last
year. For the four years, ’69, ’72, these two Acts
including accelerated depreciation, which you’ll hear about tonight, raised the tax
bill on corporations by $5 billion, but lowered the bill for individuals. And mainly low and middle-income individuals
by almost $19 billion. And as to rich individuals versus those not
so well off, the president’s low-income allowance removed some 12 million people at the poverty
level from the tax roll. Individuals paying taxes in the bottom bracket
had their tax bills reduced 82%. Individuals in the highest brackets above
$100,000 had their tax bills increased seven and a half percent. Myth number three, by raising taxes on corporations,
the government can avoid raising them on individuals. This myth is one of the most deeply rooted
of all. In the final analysis, corporations don’t
pay taxes, people pay taxes. The corporation is simply a legal arrangement
for doing business, an arrangement which incidentally has worked pretty darn well from the standpoint
of meeting the ever-growing economic needs of man. To determine which persons the corporate tax
really hits, you’ve gotta do some analysis. Is a corporation in a strong enough position
to pass on the tax to its customers? Suppose you double the taxes on the food chains,
on John Food, Safeway, A&P, and so on? They have less than a penny profit margin
on a dollar a sale, they’ve gotta pass it on or they go out of business. That could be a very regressive tax, that’s
not a tax on corporations, that’s a tax on the people that buy food, now it’s a complicated
issue. But the question of whom the corporate tax
hits is difficult to answer, except it does not fall on some amorphous thing called business,
it hits people. And the real question, does it hit rich people,
poor people, or in what degree? Finally myth number six, this myth is the
Job Development Investment Credit and the easing of depreciation guidelines in the ’71
Tax Acts were giveaways to business that failed to help the working man. Economists of all persuasions…this is the
reality, have recognized for many years that productive investment is the mainspring in
creating new jobs, raising the standard of living of the working man, containing inflation,
and maintaining and sharpening U.S. competitiveness in world markets. The first president that really recognized
this and did something about it was John F. Kennedy in 1961, ’62, in calling for enactment
of the investment credit, and then also doing a relaxation of depreciation, more importantly,
right at the moment. In 1971, this nation incurred its first trade
deficit in this century, and that was tripled in 1972. Our competitiveness abroad has been severely
eroded, and the fundamental reason the Congress, over Mr. Reuss’s objection, enacted both accelerated
depreciation and the investment credit in 1971 was to encourage our business to modernize
and compete abroad. The incidental effect of this is that we’re
gonna have about $100 billion in new productive investment this year, and that means jobs,
it means jobs, J-O-B-S, very simply. Well, this list of myths and realities, I
could go on for some time, but I think I’ve covered enough to illustrate my point. Let me conclude by saying that the real issue
in the tax arena now is not tax reform per se, although that’s important, we gotta constantly
keep to make our tax system better, we can never make it perfect. The real issue is that the typical American
believes he bears too much of a tax burden in state after state, in county after county,
in precinct after precinct, he believes that he’s not getting the bang for the buck for
the tax dollars he is sending to Washington. He believes that Uncle Sam has grown too big
for his britches and ought to be cut back. And he believes very strongly that Uncle Sam
this year ought to be able to struggle along on a quarter of a trillion dollars as the
president has proposed. And that’s why the American people strongly
support the president’s drive for bringing federal spending under control. Thank you. Robert: Thank you, Dr. Walker, a negative
reply to our rational debate question, “Major Tax Reform: Urgent Necessity or Not?” A different point of view now from our second
speaker. Henry Reuss is serving his 10th term as a
member of the U.S. House of Representatives, representing the 5th
District of Wisconsin. Congressman Reuss is one of the leading spokesman
on Capitol Hill on economic matters and has long championed tax reform. He serves on key committees dealing with fiscal
and monetary policies. Henry Reuss was born in Milwaukee, he received
his undergraduate education at Cornell University, went on to his law degree at Harvard. Congressman Reuss is the author of several
studies in book and article form on the pressing issues of the problems in economics confronting
the nation today. It’s a pleasure to present Congressman Henry
Reuss. Congressman Reuss: Thank you, Bob, and it’s
good to be at this eminent forum and with my old and esteemed friend, Charlie Walker,
on the other side. My view, of course, is just opposite to that
of Dr. Walker’s. I think our federal income tax system is a
mess. When you ask whether it raises enough revenues? The answer is it does not. Does it encourage full employment without
inflation? It does not. Does it interfere with economic efficiency? It certainly does. And finally, is it fair? It is most unfair. Let’s look at each one of these charges. On revenues, we thought by this time we were
gonna have a fiscal dividend with money running out of Uncle Sam’s ears, instead, as a result
of the war in Vietnam, as a result of the escalation of expenditures generally on the
spending side and the erosion of our federal income tax base on the other side, we now
are in the grips of very severe deficits. The 1974 Budget of President Nixon is headed
for another deficit even though he has cut to the bone, in the budget sent to Congress,
health, education, pollution funds, even the funds for wounded Vietnam veterans, although
that happily has now been withdrawn. In any event, whether you’ve got Democrats
or Republicans in charge, in order to conduct the ordinary business of the federal government,
we’re going to need additional revenues. How do you get those? I think a general tax increase at this time
is politically infeasible and economically deflationary, I don’t think we want it. This leaves plugging tax loopholes, and in
a bill submitted by myself and some 57 colleagues in the House of Representatives, we feel that
we could recover just by plugging the capital gains loophole, asset depreciation range,
hobby farms, minimum tax, and a few others. We could recover about $9 billion a year on
a quick yield basis in federal revenues, and thus be able to do the things which your federal
government needs to do, and which the people want it to do. Cut out the foolishness, but let’s, at least,
stick to the essentials. Well, what about full employment, does our
present tax system make jobs? Just the contrary, in many respects, these
loopholes fracture American jobs. Take the tax loophole under which an American
corporation, if it operates a plant in the United States, has to pay, and properly, a
tax on every penny of income it makes whether it pays it out in dividends or not. Let that corporation, however, put up or buy
a plant in Europe or in Asia, and keep its money over there not repatriated in dividends,
it then pays no federal income tax whatever on that income, totally unfair, it means that
jobs are lost. Or take a very worrisome factor about income
distribution in this country. Just in the last three years, which happens
to coincide with the administration of Mr. Nixon, the shares of our national income obtained
by the top 20% of American people, and particularly by the top 5% of American families, have gone
up at the expense of everybody else. Principally the fellow in the middle, the
average wage earner. Well, what is the meaning of all this? The meaning is that unless we have a federal
tax system which is fair and progressive, which redresses this imbalance, we’re gonna
make the gloomy prediction of Karl Marx 100 years ago come true. Namely that the private enterprise system
will run out of effective demand, and consumers won’t be able to take the product off the
marketplace, and you’re headed for a depression. I don’t wanna have Marx’s prophecy come true,
so I say plug these loopholes now before our income shares get further out of whack. Well, what about the efficiency of our tax
system? Again, it seems to me most inefficient. Take the capital gains tax whereby someone
who sells stock that shows an appreciation has to pay a tax on it, as is fair. But if he holds it until his death, he not
only or his estate not only has to pay no tax on that gain, but his heirs or whoever
he gives it to by will take it at the appreciated value. And when they sell it at that value, they
don’t have to pay any tax either. This is not only a great loophole, but it
causes families and individuals to hang onto stocks of horse and buggy companies instead
of selling those stocks and investing in modern high technology companies. Or take the so-called hobby farm tax provision,
under which a hobby farmer, a millionaire or a rich person, who buys a farm just as
a tax shelter is enabled to escape large shares of the regular income tax he would pay on
his other income. Well, this tax loophole means that we merely
bid up the prices of farmland and overload the country with farm commodities, both of
which hurt the regular farmers. The cost of these loopholes in terms of what
they do is unbearable, for example, we spend a billion, $400 million a year of taxpayers’
money in fostering oil exploration in this country, so it is said, via the oil depletion
allowance. Yet a Treasury study a few years ago calculated
that that only resulted in about $140 million worth of new domestic oil reserves. In other words, it costs 10 times as much
to get the reserves as the reserves are worth. Finally, we need equity in our tax system,
I think it’s outrageous that Gulf Oil Company in 1970 made almost a billion dollars in net
profits, and on that income paid only 2% in federal income tax. Meanwhile, the 60-year-old widow who cleans
the office of the president of Gulf Oil at night, and who makes $7,000 a year, is in
a 7% bracket, this is supposed to be tax equity? Or take the Social Security payroll tax, a
worker making $10,000 a year pays that tax at the rate of 5.85% of his income. Whereas the president of one of the big multinationals,
AT&T, who makes an annual salary of $800,000 pays a tax at the rate of 0.8%, a tiny fraction
of what a $10,000-a-year wage earner pays. Well, what are the prospects for reform? As far as the administration is concerned,
I don’t think they’re very good. Just last spring, the president was down at
the Texas ranch of then-Treasury Secretary Connally, and all of the oil millionaires,
and the banking millionaires, and the industrial millionaires of Texas were assembled. And the president made them a graceful little
speech in which he said that the only thing he had against the tax system were that the
oil depletion loophole and the rapid depreciation loophole weren’t big enough. And he then polished off his remarks by saying
that, “It was too bad about those welfare mothers that they always wanted something
for nothing.” Well, needless to say, the audience went wild
with applause. And I think that Mr. Nixon is so hooked into
the tax loophole lobby that it is unreasonable to expect that he will do anything about it. I hope that the House Ways and Means Committee
which is now engaged in an in-depth survey of tax loopholes is going to do the right
thing about it. Here, one of the most powerful men in Congress,
Wilbur Mills, will have a great deal to say about it. I know that people in Europe are watching
to see what the Democratic Congress does, because people in Europe know that the Democrats
are going to want to restore some of the cuts Mr. Nixon made in health, and education, and
the environment. And the only way they can maintain the budget
on a sound basis is by finding additional revenues to make those cuts. And that means that the world is waiting for
the word from Wilbur, and I hope it is affirmative. Because the last Tax Reform Act, so-called,
that we passed back in 1969, is in the words of a great American and a great patriot, and
here I quote, “No more than a highly important first step in reshaping the federal tax system
to make it fair.” That statement was made by my friend, Charlie
Walker, and I don’t see how it could have been better put, and I hope his dream of 1969
comes true. Robert: Thank you, Congressman Reuss. Well, you’ve heard each other’s statements,
we’d like to have a brief period of rebuttal now. Dr. Walker. Dr. Walker: Well, I’d like to, first of all,
say that I got four minutes here, and I got 40 items on my list, I’m gonna have to prune
them, I’m gonna have to prune down a little bit. With respect to the 1969 Act, I would like
to quote an even greater American, Wilbur Mills, who after the act was passed said that,
“This is a monumental effort a tax reform and the country should be proud of it.” The statement that the congressman quoted
from me was when we went to the Congress in April ’69, the first administration to really
move legislatively for tax reform in many years. We wanted to stage it over a two to three-year
basis and not in one year, and I was referring to the original approach and not the final
act that passed, it was massive and monumental. The congressman has asked the right questions,
I’m not gonna challenge him on that with respect to what we want our tax system to do. I would add points about the environment and
social policy and other things you can do by getting people to tax them if they do the
wrong thing and give them a tax preference if they do the right thing. But this question of loopholes, you see $70
billion, $60 billion, $40 billion of loopholes and really when you look into that, those
aren’t loopholes, they’re things that Congress did intentionally and people liked. Like the deductibility of your interest on
the mortgage on your house, and the taxes on the mortgage on your house, and double
exemptions for the blind over 65 and this and that. Those aren’t loopholes in my book, and they’re
not loopholes in any particular congressman’s book. Mr. Reuss thinks that you can get the additional
revenues to keep from…to reduce the rate of growth in the budget. The president is not cutting the budget, the
budget is going up $18 billion this year over last, and another $18 billion or $19 billion
next year over this. It’s the rate of increase that’s slowing down. But if you wanna keep that rate of increase
going up, the congressman says, well, let’s reform taxes to raise revenues. Don’t you believe it? I’ve lived through that, what the average
typical person thinks tax reform means to him is, “Reduce my taxes.” So the Tax Reform Act of 1969, through the
inexorable legislative process, turned into a massive tax cut. It was a very great disappointment to me personally,
but once you get out there on the floor of the House, particularly the Senate, Congressman,
oh, boy, they’ll cut taxes till you’re blue in the face. Because we’ve got a democracy and that’s what
people want, they don’t like high taxes. We mentioned several areas and shelter areas,
so-called capital gains, ADR, hobby forms, take hobby farms. If you go into the cattle feeding business,
you get a tax preference now, but people want beef like crazy in this country, and housewives
are very unhappy about the price of beef going up. One way to get the price of beef down is to
give more tax preferences for feeding cattle and getting choice beef in. Each tax preference has its other side. I favor the old depletion allowance if it
is adjusted to force the oil companies to plow back the benefits of depletion and intangible
drilling costs into further exploration to help solve this energy crisis. Or one day you’re gonna flip a switch up in
the East and the lights aren’t gonna come on because we’re out of energy. He talked about Gulf Oil and the foreign tax
credit, Gulf Oil pays huge taxes abroad, this is a difficult area. We need to do something about it, but it takes
two to tango, and you’ve gotta tango with the sheikhs in Kuwait and everybody else before
you work out this problem of the foreign tax credit on income shares. To use a tax system to redistribute income
can be both not only fallacious but a very pernicious sort of operation if you destroy
incentive in the process. And I will not accept a quotation or a forecast
from Marx 125 years ago that proved to be absolutely false, namely that capitalism was
driving to hell in a handbasket and very, very quick. Mr. Marx was quite wrong on that score. Tax shelters, I very much favor a tightening
of the minimum income tax, if the Congress had taken the minimum income tax the administration
set up in 1969, that list of non-taxpayers would be much smaller today. Because we sent a tough one and it was very
much watered down in the process in the Congress. I come back to the fundamental point. The real question is are we taxing too much
savings and investment biased in that direction or against savings and investment away from…in
terms in favor of consumption? Shouldn’t we take a real hard look at our
tax system, and I raise a question for the question and answer period, shouldn’t we look
at value-added taxes and other approaches which minimize taxes on saving and investment
in order to get the economic growth and investment that we’ve gotta have if we’re gonna compete
in an increasingly competitive world? Robert: Well, before we do take questions
from our audience here at the American Enterprise Institute, we’ll hear Congressman Reuss’s
rebuttal. Congressman Reuss: Charlie Walker says that
the American oil companies are merely tangoing with those sheikhs over in the Middle East,
well, it’s the American taxpayer, who gives a depletion allowance for foreign oil drilling
as well as domestic, who pays for the music of that last tango. I think there ought to be an end to it. Charlie says that we need beef in this country
and so we oughta give the meat lobby even more of a tax preference than what they’ve
already got. I suggested a way last June to the administration,
a good way of getting more beef in this country, namely let the cattle into the 60 million
acres of idled farmland, idled at the taxpayers’ expense in this country. The administration did nothing until last
month having said they couldn’t do it, and finally, they did it. But meanwhile, the American housewife is paying
75 cents a pound per taxpayer, for hamburger, the same thing. Charlie comes on strong for the investment
tax credit as a great incentive to productivity and foreign trade earnings. Well, if someone will design an investment
tax credit that is really beamed at high technology export-oriented industries, I’ll buy it. But the present one which costs the taxpayers
$3 billion a year is for investment whether it’s needed or unneeded, whether it’s good,
bad, or outrageous. Take the case of Mr. Joe Conforte who owns
a big chain of houses of prostitution in Nevada where they’re legal. Joe was on television a few weeks ago bragging
about how he just loves that 7% investment tax credit which he gets on new beds. Here’s Joe, “I don’t see any reason why my
business shouldn’t be treated just like any other business, and the Internal Revenue thinks
the same way we do.” Well, the American taxpayer thinks the whole
thing is unfair and immoral, and it wants those loopholes plugged. On this investment tax credit, I think it
should be repealed. Business fixed investment in this country,
according to the Council of Economic Advisers, is increasing this year over last at the rate
of 14%, and this added stimulus is just heaping inflationary fuel on the fires of inflation
that exist anyway. On this point, I’d like to quote from one
of my favorite public figures, quotes, “Repeal of the investment credit will tend to dampen
demand in a sector of the economy that is moving much too fast, the market for business
equipment.” Well, that statement was made back in April
1969, at a time when business investment was rising at a rate of 10% as opposed to the
14% which it’s rising now. And the reasons for repealing the investment
tax credit are much greater today than they were four years ago. But the man who made that statement was, as
I say, a great American, a great patriot, and a great friend of mine, then-Undersecretary
Charlie Walker. And as I said before, in 1969, Charlie Walker
was my leader, it’s just that in 1973, I think he’s giving us some very poor advice. Peter: Obviously, depending on where you sit,
the American tax system is either eminently fair as Dr. Walker says, or extremely biased
and one-sided in the view of Congressman Reuss. Dr. Walker, as one of those who helped set
up the present tax system in the Nixon administration, agrees there should be some changes, but he
warns that any drastic shifts could put the whole economy in peril. Representative Reuss, on the other hand, says
that unless the U.S. tax system is modified, the loopholes closed, the country is headed
for trouble. To challenge both speakers, let’s go now to
our panel of experts for their questions. Robert: Your question, please. Tom: I’m Tom Stanton of the Tax Reform Research
Group, I’d like to address my question to Mr. Walker. On June 22nd of last year, President Nixon
at a press conference promised he would send tax reform proposals to Congress by January
1st, 1973. On June 24th, Secretary of the Treasury Shultz
wrote in a letter to Senator Javits that this statement by the president was, quote, “A
firm commitment.” You were a very high official in the Treasury
Department between June and the first of the year, and I was wondering if you could tell
us why the president was led to break his word? Dr. Walker: Well, my comment on that question
is I don’t think the president has broken his word in the sense that he meant it in
those press conferences, and Secretary Shultz meant it. I think what he meant was that he would have
proposals for the House Ways and Means Committee. When Mr. Mills and his committee was ready,
really, to take up tax reform, and have the administration position, Mr. Mills has elected
in the hearings to start with a series of panels to discuss the issues and then have
public witnesses. So far as I know…and I have no inside information
on this, so far as I know, the president will be sending tax proposals early in this session
to Congress. And if you want to make a federal case on
January 1 versus, say, April 1, well, it’s fine with me, I would simply say that the
first major tax reform in the history of this republic was passed in the first year of a
Republican administration and signed by a Republican president. Robert: Question back here, please. Got a question, sir? Roger: Roger Freeman, Hoover Institution at
Stanford University. My question is directed to Congressman Reuss. You referred to the huge tax loopholes which
are available to its people and enable them to escape their proper share of taxation. I wonder whether you have studied the amount
of personal income which presently is not subject to the federal income tax. You may…and I presume you are aware of the
fact that as of 1970, out of $805 billion of personal income, only about $400 billion
were taxable income, which means that about half of our personal income is not subject
to taxation, federal taxation. Have you in any way studied the distribution
of that $400 billion of non-taxed income between the high and the low-income groups? And have you come to any results what share
of that non-taxed $400 billion, who is the person in the high bracket, and how much in
the low bracket? I have another comment on that, but if I… Robert: Let’s get the answer to the question
first, if we may, Congressman Reuss? Congressman Reuss: Let me answer Mr. Freeman’s
question. Yes, I made a close study of it, and I’ve
relied particularly on the pioneering work of Heckman and Aukner [SP] at Brookings Institution,
from which one concludes that while, of course, great sums of income are remitted to taxpayers
in the form of allowances for their children, medical expenses, home ownership costs, and
so on, all of which is a perfectly equitable system of dividing up tax monies, that some
$30 billions, underline that, $30 billions a year is excluded from adjusted gross income
from loopholes like the capital gains, state and local bond interest, accelerated depreciation,
percentage depletion. So that the kind of loopholes which add to
the burden on the average taxpayer are, in very large part, precisely those loopholes
which are enjoyed by wealthy tax avoiders who can employ the world’s most skillful lawyers
to point out these tax avoidance methods to them. Roger: Do I understand then, Congressman,
that out of the $400 billion, about $30 billion are in the higher brackets for capital gains
and similar things, and $370 billion go to the people in the middle and lower middle
and low-income groups and that therefore, you have about an 8% to 92% distribution where
most of it and almost all of it is actually in the lower middle and low-income groups
where the income is not subject to taxation? Congressman Reuss: Yes, I may seem old-fashioned,
but to me, $30 billion is a lot of money, and if we could put just a small part of that,
say, billion into the federal treasury, then we could give tax relief to those who need
it most. Or at least freedom from the grinding succession
of overall tax increases, which has been the lot of the average taxpayer, the average wage
earner in this country. So I say that $30 billion, even if it isn’t
more and there are authorities who say that it’s more like $70 billion or $80 billion,
but even $30 billion worth of loopholes is $30 billion too much. And I say let us recapture at least part of
that for the federal treasury… Dr. Walker: Can I comment on that? Robert: Go ahead, Dr. Walker. Dr. Walker: Undersecretary of the Treasury
Edwin S. Cohen, who’s recognized as one of the top tax experts in the United States,
testified before the Joint Economic Committee last summer…of which Mr. Reuss is one of
the senior distinguished members. And just to give you an example of two as
to how the tax preferences are loopholes, so-called, hit various income groups, let’s
take one, or two, or three. The deductibility of interest on mortgages
on owner-occupied homes. It’s not a loophole to me, that’s a loophole
to some other people. The greatest benefit there was $719 million
to people in the $10,000 to $15,000 income class. Deductibility of property taxes on owner-occupied
homes, the greatest benefit, again, was in that class. As far as the blind, and the disabled, and
the aged, the greatest benefit was in the $7,000 to $10,000 class. And for the net exclusion of pension contribution
and earnings plans for employees, the greatest benefit was in the $10,000 to $15,000 class,
and those aren’t the people that are having three martini lunches in Wall Street every
week. Robert: Let’s go to another question, sir. Robert D.: I’m Robert Delamore [SP], I’m with
Common Cause. On Dr. Walker, you stated that you believed
our present tax system created a bias against investment. It seems to me that several of the tax loopholes
we talked about this evening are, in fact, a double subsidy of investment. One example is percentage depletion for oil
companies, and then stockholders in oil companies take favorable capital gains treatment. Another example is the investment tax credit
coupled with the ADR system which was just enacted. Another example is export subsidies coupled
with the domestic sales corporation or dis-proposal. It seems to me that these, in fact, are very
favorable to investment, and run counter to the interests of the general taxpayer. Dr. Walker: Well, there are several comments
I could make to that question and would have to do with the foreign tax credit, the investment
tax credit and so on. And I would have commented on Mr. Reuss’s
earlier presentation if there had been time. You have a bill before the Congress known
as the Burkaki [SP] bill which would eliminate the deferral of the foreign tax and would
eliminate the foreign tax credit. What you gotta understand there is the multinational
corporation that this would hit is simply a corporation domiciled in the United States. And you do something about that tax treatment,
they will become domiciled elsewhere and you’re not gonna get any revenue from the federal
government out of that. But that’s not really the point I wanna make,
the point I wanna make is this, not that we are not… Finally beginning under the leadership of
John Kennedy in ’61, ’62, and the good work of Walter Heller, and Douglas Dillon, and
Joe Fowler, in getting these things done in moving towards reducing the tax on investment. Not that we haven’t done something there,
but we haven’t gone far enough, and I’ll conclude with one example. What got through the Congress, the investment
credit, and the accelerated depreciation. In 1971, was one simple table, one piece of
paper which I hold in my hand, which compares the cost to businessmen here and in countries
abroad of buying new productive equipment allowing for the corporate tax, tax allowances,
tax credits and the depreciation system. In 1970, the businessman in the United States
for what he was paying 100 cents on the dollar cost a businessman in Japan or Western Europe,
with an exception or two, 79 to 83 cents on the dollar. The Revenue Act of ’71 lowered the cost to
the American businessman about 87 cents. Still quite a bit higher than the foreign
businessmen are paying at a time when we’ve got a $6 billion trade deficit. And don’t think that ain’t no problem, it
is a horrendous problem. Congressman Reuss: I must comment… Robert: Go ahead, Congressman. Congressman Reuss: …comment briefly on the
suggestion by Dr. Walker that if we tax multinationals on the same basis as we do American corporations,
that is, made them pay an income tax on their income whether they pay it out in dividends
or not, that somehow they’re gonna desert the United States and hightail it for overseas. Well, I would just have two comments on that,
one, when they do that, they may find shortly that things aren’t so glorious in Bulgaria,
or Bangladesh or wherever they go to. Secondly, however, I would favor a charitable,
indeed, a liberal attitude toward them and would be glad to give them amnesty if they
wanna come back. Robert: A question over here, please. Sir? Yes. Yes, please. Jerry: Jerry Brennan, Georgetown University. I’d like to address this question to Mr. Walker. I was interested in your comment that the
oil depletion allowance should be limited to companies that reinvest in oil drilling. Doesn’t this highlight the effect of specialized
tax incentives? In effect, you wanna say that there should
be a subsidy for investment in oil drilling, but this should be limited to companies who
got their money from oil in the first place through the oil depletion allowance? If you want subsidy for oil investment, wouldn’t
it be better to just do it outright, and not limit it to companies that earn their money
from oil? Dr. Walker: Two comments on that. My very good friend and former helper in the
Treasury Department, Jerry Brennan, who’s a tower of strength on the investment credit,
not on depletion, but the investment credit. You give me a choice…and some of my former
bosses at Treasury disagree very strongly with this. But you give me a choice on creating a social
good and a good social effort. You remember how we beat our heads out trying
to get Congress to pass a lead additive tax on gasoline in order to clean up the environment,
we didn’t win that one. But you give me a choice of achieving a good
social goal through a tax subsidy on the one hand or an outright government subsidy on
the other hand, I’ll take the tax subsidy every time for two reasons. One, it works through the market process and
induces the company or the person to do something he wouldn’t do if it weren’t for the tax subsidy. Second, you do not have to create a federal
bureaucracy to administer the subsidy on the basis of the judgment of certain individuals,
well-meaning, in various departments. Now with respect to the depletion and the
plow back proposal, which I’ve been for from some time, as Woodrow Wilson said, “When we
set up the Federal Reserve system, we don’t have a clean sheet of paper to work on.” We are not reworking and remaking our economy
anew from the word “go,” we’ve got something going. We have an oil depletion allowance which was
the result of a compromise between the House and the Senate in the 1920s on the basis of
what they thought was actual depletion. And one house said 30%, the other house said
25%. In our great system, 27 and a half was the
result of that. Now you’ve got a 22% depletion, and maybe
you can get it repealed and put in the subsidy. But I would rather take that and work with
it in the political process to make it a better subsidy to help solve the energy crisis which
it can be with plow back. Robert: Question back here, please. George: George Will, National Review, I have
a question related to this use of subsidies and tax incentives. And it’s a question about something both debaters
are agreed upon. They’re agreed that the tax system should
be used to encourage a proper balance between consumption and investment, they differ as
to whether we’ve hit that proper balance. My question is whether or not both may not
be giving the government the unwarranted benefit of altogether warranted doubts about its ability
to fine-tune the economy with the revenue system. Given the limited data we have available,
given the legislative lag that may be up to two years in tampering with the tax system,
is this really an efficient way to regulate these matters? Robert: Let’s get both of you answering that,
shall we? Congressman Reuss? Congressman Reuss: Good question. I would agree with the implication of the
questioner. I think the tax system is not a very good
way to fine-tune the economy, and that we would do best if we attempt to shoot at full
employment without inflation in this country. And let investment, for instance, adopt a
harmonious posture with respect to what a full employment economy wants to take off
the market. I think that’s a much better way of doing
it than hypoing investment by these various devices. Robert: How do you feel about that, Dr. Walker? Dr. Walker: I think we’re talking about two
different things here. I’m very glad to see and meet Mr. Will, my
fellow columnist in “The Washington Post,” who is in the audience tonight. In far as using the tax system for fine-tuning
in a macroeconomic sense, in other words, total problems in inflation and supply and
demand in the economy, I am very much against that. I think it disrupts business planning, I think
the idea to turn on and off the investment credit either at the will of Congress or the
president is a very bad idea. Even though my old friend, Arthur Burns, has
been endorsing this recently. I’m talking about something differently. I’m talking about using tax preferences or
tax penalties to promote social goals. And I’ll give you just three examples that
we got into the 1969 Act. We got a five-year phased write-off amortization
to rehabilitate low-income housing. We got a five-year phased write-off for railroad
car rolling stock because if you remember, in 1969, wheat was rotting out in the West
with an absence of railroad freight carts. And we got a five-year phased write-off for
antipollution equipment investment. Furthermore, these provisions expire in five
years unless the Congress finds reasons to extend them. To me, that’s the best of all worlds in tax
preferences for social goals, and it’s not fine-tuning, it’s to achieve other social
goals rather than economic growth and stability. Robert: Sir, your question here, please. Norman: Norman B. Ture, incorporated in Washington
DC. Mr. Walker, if I may take the liberty of elaborating
by asking a question. It seems to me that in your remarks addressed
to the disparity in the weight of taxation on saving and investment on the one hand and
consumption on the other, you were addressing yourself to something more than merely the
seeking out of particular objectives of social policy. It seemed to me that what you were addressing
yourself to was that, analytically, it can be shown very simply that our present income
tax structure and other features of our overall tax system impose a much, much more substantial
cost for buying future income, that is for saving and therefore for investing than they
do for equal amounts of consumption. And against a standard of equal treatment
of saving and consumption, many of the things that emerge that are called loopholes do not
appear to be loopholes at all, they represent only very modest abaitance [SP] of that bias. Certainly, the tax on capital gains cannot
be regarded as a loophole, it ought to be regarded as an additional penalty tax on saving
and investing. Robert: And that’s your question. Dr. Walker: Can I make a comment on that? Robert: Go ahead, please. Dr. Walker: I can’t find much to disagree
with, you know, I bet it’s gonna surprise all you people out there in television land
that we tax capital gains more heavily than almost any other country in the world. Now you can ask yourself a question, for all
those people in those countries some of which have been growing, galloping, galloping, relative
to us, have they got their heads screwed on wrong? Maybe they got something. And maybe this value-added tax…I hate to
open up a complete new issue, but its involved here. Maybe this value-added tax which… For example, you make x thousand dollars a
year, I make x thousand dollars a year, let’s make a dumb assumption and assume you and
I make the same. I know you probably make a lot more than I
do. Robert: I have to make more. Dr. Walker: Now in terms of the income tax,
given the same deductions and same family situation and so forth, you and I will pay
the same basic federal tax. We don’t got capital gains, we just got salary
and that sort of thing. But let’s suppose that you’re a very thrifty
person, and you save a big part of your income and you put it in the savings and loan to
build houses, and you put it in the bonds to build factories, and you put it into the
savings-investment process and we get a lot of good economic growth and jobs. And I throw mine away…my wife is here, on
wine, women, and song and high living, and don’t save a bit. Under the income tax system, we both pay the
same rate, but under a value-added tax system, which is not really a sales tax, it is a spending
tax, the person that spends and doesn’t saves [SP] pays a higher rate. And it’s time we started thinking about that. And these Europeans that are going in that
direction, they’re not all that dumb. Robert: Well, since you did open up value-added,
do you wanna comment, Congressman Reuss? Congressman Reuss: Yes, first briefly on the
question raised by Mr. Ture as to whether we have enough incentive for business investment,
wasn’t that your question? Norman: No. Look, Congressman Reuss, I was not talking
about incentives at all. I don’t regard these provisions as incentives,
I regard them as extremely mild abaitance of enormous bias against saving and investment. Congressman Reuss: All right. You say there’s a bias against saving and
investment. I point out that savings in this country have
been enormous. $70 billion or $80 billion has trickled over
to Europe and the Eurodollar market. Incentives are the greatest-ever corporate
profits, the greatest in the history of the republic. So don’t tell me that we don’t offer sufficient
inducements to save and to invest. Now on the value-added tax, let me just say
that it isn’t going to help very much for the average wage earner to be told that things
are a little better for him. If, as a result of things being improved a
bit, he’s gonna have a sales tax called a value-added tax added on to him. I had thought that the value-added tax had
been laid to rest by the recent studies of the very nonpartisan Advisory Commission on
Intergovernmental Relations, apparently, it is an idea that is still being toyed with
by the administration. I persist in saying that if we need more income
in the federal treasury, which we do, the way to get it is by a progressive tax rather
than by another sales tax, value-added tax. Dr. Walker: I gotta make just one comment
on this. I very much agreed with the point in Congressman
Reuss’s paper which he didn’t make in his oral presentation, we had to be compressed,
that the great growth in the payroll tax in this country is something we’ve gotta be very,
very concerned about. So I would like to suggest consideration of
a value-added tax which can be put on a non-regressive basis, very easily and made proportional,
for. say, $25 billion to use to substitute completely
for the payroll tax. Congressman Reuss: Well, I think the answer
of the American wage earner, if he ever understood that, would be to say, “Thank you, Mr. Walker,
for wanting to reduce our payroll tax, which is miserable, but thanks for nothing by offering
to put another sales tax on middle-income people.” That’s what it would do even with this little
relief for the very poor. Dr. Walker: And you have to ask yourself why
did the workers and the union support the value-added tax in Scandinavia? And there is a very simple reason why they
did so, and why I predict, one, that you will have a value-added tax in this country within
six to eight years. And two, the liberal establishment will be
supporting it in two to four years because it is one hell of a revenue raiser. And if you wanna support the level of spending
that the liberal establishment wants to support, the best tax to support it is a value-added
tax and not a progressive income tax that drives every taxpayer in a bracket up the
wall every April 15th. Congressman Reuss: So I’m glad I don’t belong
to that liberal establishment and I’ll be free to continue to oppose the value-added
tax. Robert: Question back here, please. Paul: One aspect of… Robert: Could we ask you to identify yourself,
sir? Paul: Oh, yes, Paul McCracken, the University
of Michigan. One aspect of tax policy has to do with the
fiscal policy aspects that is using our budgetary process for stabilization purposes. I noticed the economic report gave some cautious
sympathetic comments with regard to giving the president some limited authority to vary
tax rates. I wondered if the two participants could comment
on this aspect of tax policy. Robert: Who would like the first go at Dr.
McCracken’s question? Dr. Walker: I’m against it, and as Dr. McCracken
knows, I’m an economist by training, I’m sort of a political observer by experience. And there can be some safeguards work then,
Congressman Reuss may have had some, I know Congressman Moore had suggested safeguards. But in our political democracy, to give the
president a power which he might…any president might use in October of a year divisible by
four in sort of a positive direction, you know, that bothers me. And I think that if you will sort of stabilize
the whole fiscal picture in a sort of full employment budget balance idea, basically,
that monetary policy is your tool for variation in the short run, not fiscal policy. Congressman Reuss: This is ridiculous. Dr. Walker, a loyal Republican, opposes the
president’s suggestion, and I, a contentious Democrat, am fairly sympathetic to it. I think with proper safeguards, which Charlie
Walker is fair enough to say have been suggested. With proper safeguards, I think the tax rates
should be modestly variable to take account of the business cycle. I think both monetary policy and fiscal policy
ought to have a little more flexibility than it’s had. Dr. Walker: One other point on that, and I’m
not really contesting with the congressman here. Our economic analysis in the Treasury and
elsewhere very strongly supports…I don’t wanna get deep into economic theory, what’s
called the Friedman permanent income hypothesis, we saw it on the withholding recently, and
we’re gonna see it this year, and we saw it in the 1968 tax, that if you temporarily raise
or lower taxes, people don’t pay much attention to it, because they look beyond that, and
the 1968 tax increase didn’t seem to have all that bang, because people thought it would
expire. Robert: Well, thank you both very, very much
for a very stimulating discussion of our rational debate topic, “Major Tax Reform: Urgent Necessity
or Not?” We hope we’ve helped you contribute to your
understanding the problem and the solution. Thank you, and good night. Peter: The debate you have seen featured the
conflicting viewpoints of qualified experts in the tax field. It’s the aim of the American Enterprise Institute
to clarify the issues by presenting many opposing views. By so doing, it’s hoped that those in decision-making
positions will benefit from this exchange of informed and enlightened opinion. This is Peter Hackes in Washington. Announcer: “Washington Debates for the ’70s”
is created and supplied to this station as a public service by the American Enterprise
Institute, Washington D.C.