|lenge. And as one congressman out
of 435 I intend to do what I can to bring that about.
CHAMBER OF SELECTED HORRORS
Keeping in mind that every time someone escapes
a tax he otherwise would have to pay, someone else has to make it up
you're salaried, usually your name is placed in nomination), let's
take a look at a few of the loopholes in our Internal Revenue Code. There
are many, many more, of course. This will be merely a chamber of selected
The Capital Gains Windfall
|Each of four married taxpayers
had an income last year of $50,000. Each had two children to claim as exemptions.
Taxpayer A played baseball, B wrote a book, C was a surgeon, and D sold
an invention for a pretzel bender. After computing their taxes, Taxpayers
A. B and C each paid the IRS $13,338, or 26.8% of his gross income. However,
Taxpayer D, taking a "capital gain" on the sale of his invention, paid
only $4,412, or 8.8% of his gross income.
* * *
Each of three married, but childless,
taxpayers had incomes last year of $8,000. Bill was a school teacher, Joe
the owner of a hardware store, and Jack a kind of drifter with a few dollars
to invest. Bill and Joe each paid $1,000 in Federal income taxes. Jack,
having made all of his income on a "hot" stock he held for 6 1/2 months,
reported his $8,000 as a "capital gain," was able to deduct half of this
as tax-free, and paid $354 tax on the remainder. His saving compared to
Bill and Joe: $646.
Inequities of this kind are not the exception
in our tax system; they're the rule. Money derived from labor, whether
physical or mental, pays the full rate; money derived from money
-- that is, investments -- pays much less.
Passed in 1921, the capital gains tax made sense
originally. It was designed to encourage business investment and to cushion
the impact of appreciation in property values which has occurred over a
number of years. For example, if a man built a factory and owned it for
20 years, during which time it gained in value by $100,000, it would seem
to be unfair to make him pay taxes on the entire $100,000 in the year of
sale (say at a 70% rate) when what had actually occurred was that he had
made $5,000 a year for 20 years.
For a time the capital gains tax was computed
on a sliding scale according to the length of time involved; longer periods
of investment were given greater consideration than shorter periods. But
over the years the length of time property had to be held to qualify for
full "capital gains" has shriveled until now it's only six months. And
over the years the kinds of property and business situations covered by
the capital gains tax have greatly increased in number and complexity.
One crazy contradiction: income from the sale of Christmas trees is
a capital gain; income from the sale of apple trees is ordinary
In 1966 there were 644 people who declared incomes
of more than $1 million. Of these, 362 made more than half of their income
on capital gains. The average gain was more than $4 million.
I'm sure most Americans have nothing against the
idea of encouraging business investment. I'm for a policy which will provide
the money to keep our economy growing at an orderly rate. But surely there
are better ways of encouraging investment than
this. Quite simply,
the effect of capital gains taxation is a tremendous tax break for the
people who have money to invest as against people who have only time, labor
or professional skill to invest.
Annual revenue loss, which must be made up by
higher taxes on you and other taxpayers: $6 - 7 billion.
The Municipal Bond Shelter
|At the age of 21 the son of
a successful real estate promoter finds himself with $1 million to invest.
|gambling instincts of his father,
he instructs his broker to purchase tax-free municipal bonds, currently
selling for 5 1/4%. Thereafter he spends his time clipping coupons, collecting
his interest and relaxing at the country club. His annual income from these
investments: $52,500. His Federal income tax: zero.
Bear in mind that the same young man, earning
that much money through sheer genius and hard work, would have had to pay
a tax of $22,980 if single, or $14,468 if married with two children. Instead,
he pays nothing. Our taxes defend him from all enemies, foreign
and domestic. When he uses a Federal airport, a harbor, a national seashore
or park, he goes as our guest; you and I pay his way. And, ironically,
with all his tax-free money, he's more likely to use such facilities than
Like other tax preferences, this one began with
a very legitimate purpose: to help cities, counties, sewage districts,
school districts and the like to borrow money for improvements at low interest.
I don't suppose it occurred to Congress that this could become a tax shelter
for the very rich. Yet it has.
In 1967 persons in the over-$100,000 class collected
$440 million in tax-exempt interest from municipal bonds. The reason:
tax-exempt interest, while lower than other interest, yields a greater
return, after taxes, than most other investments.
I'm certainly for helping cities and school districts,
and to this end I've voted for Federal programs which would provide them
with substantial aid through loans and grants. But I feel this country
must find a better and more efficient way of easing their financing problems
than this system which provides a tremendous tax break to a very small
class. Tax-free bonds save these local borrowing agencies about half
as much as they cost the Federal government. The difference goes into
the pockets of the bondholders.
Annual revenue loss: $1.8 billion. Saving to local
borrowing agencies: $.9 billion.
The 'Family Farm' Gambit
|A movie star with income in
the 70% bracket invests $200,000 in a breeding herd and a year's supply
of feed. On his tax return he's a perfectly lousy farmer, for he shows
this entire amount as a "loss" for the year, reducing the taxes on his
movie income by $140,000.
The next year he sells the herd
for $200,000, his original cost. Ah, you say, now he'll pay his rightful
taxes; obviously, on the purchase and sale he broke even. Wrong! You see,
the entire sale goes as a
capital gain, and his tax is only 25%, or $50,000.
Thanks to his terrible luck at farming, he is left with a net saving in
taxes of $90,000 in two years -- and all of his original money back.
Years ago, in an effort to make bookkeeping easier
for the average dirt farmer -- struggling over his ledger under a coal-oil
lamp -- Congress passed a law allowing him to use the "cash" rather than
"accrual" method of accounting for income and expenses. This option was
helpful to ordinary farmers and made little difference in their taxes.
But, as we have seen before, it didn't stop there; rich movie stars, brokers
and advertising men saw in it a means of greatly reducing their taxes.
And outrages like the one above began to appear. There are today many astute,
upper-income taxpayers who have suddenly become "family farmers" -- but
who never feel the soil.
There are two great evils here. One is
the tax loophole which undermines the progressive income tax and gives
an enormous advantage to people with a lot of money to invest. The other
is the effect this practice has on ordinary farmers, who are trying to
make an honest living growing crops and raising livestock. Entry of the
tax-avoiding investor into agriculture tends to drive up the price of land
and put the small farmer at a disadvantage in selling his produce.
Annual revenue loss: $145 million.