Mr. Mellon Proposes

Knowing that a struggle was inevitable, Andrew W. Mellon, Secretary of the Treasury, took the future by the forelock. It is a settled question that the next Congress will have the choice either of giving the soldiers a bonus or of reducing taxation. The progressives in Congress are militantly for a bonus. Many of the conservatives, including Senator Reed Smoot, Chairman of the Senate Finance Committee, without advocating the bonus, regard it as a certainty. Not so, Secretary Mellon.

In a letter to William R. Green of Iowa, Chairman of the House Ways and Means Committee, Mr. Mellon directly opened the question of bonus vs. reduced taxes--deliberately opening the issue several weeks before it would normally be approached, deliberately striking the first blow. He laid out a program for tax reduction, showing just how much in dollars and cents it will save to each group of 14,000,000 incoming taxpayers. He added: "A soldiers' bonus would postpone tax reduction not for one but for many years to come."

The Proposal. The Government has at present, an annual surplus, about $300,000,000, on receipts over expenditures (including sinking fund and other public debt payments). To the taxpayers, the beneficiaries of this surplus, taxes may be cut as follows:

1) Make a 25% reduction of taxes on earned incomes (salaries and wages, as opposed to interest and dividends).

2 ) Where the present normal income tax is 4%, reduce it to 3%; where it is 8%, reduce it to 6%.

3) Reduce surtax rates by commencing "their application at $10,000 instead of $6,000 and scaling them upward to 25% at $100,000. "This will readjust the surtax rates all along the line, and the Treasury recommends the readjustment, not in order to reduce the revenues, but as a means of saving the productivity of the surtaxes. In the long run it will mean higher rather than lower revenues from the surtaxes. At the outset it may involve a temporary loss in revenue, but the Government estimates that even during the first year, if the revision is made early enough, the net loss in revenue from all the changes in the surtaxes would be only about $100,000,000, and that, in all probability, the revenue from the reduced rates will soon equal or exceed what would accrue at the present rates. . . .

"The readjustment of the surtaxes, moreover, is not in any sense a partisan measure. It has been recommended on substantially this basis, by every Secretary of the Treasury since the end of the War, irrespective of party. . . .

"Taxpayers subject to the higher rates cannot afford, for example, to invest in American railroads or industries or embark upon new enterprises in the face of taxes that wiill take 50% or more of any return, that may be realized. These taxpayers are withdrawing their capital from productive business and investing it instead in tax-exempt securities. . . .

"The growth of tax-exempt securities, which has resulted directly from the high rates of surtax, is at the same time encouraging extravagance and reckless expenditure on the part of local authorities. . . ."

4) Limit the deduction of capital losses to 12 1/2% of the loss. The present revenue law limits the tax on capital gains to 12 1/2%, but puts no limit on the capital losses. It is believed it would be sounder taxation policy generally not to recognize either capital gain or capital loss for purposes of income tax. This is the policy adopted in practically all other countries having income tax laws, but it has not been the policy in the United States.

So long, however, as our law recognizes capital gains and capital losses for income tax purposes, gain and loss should be placed upon the same basis.

5) Limit the deductions from gross income for interest paid during the year and for losses not of a business character to the amount the sum of these items exceeds tax-exempt income of the taxpayer.

6) Tax common property of husband and wife to the spouse having control of the income. (Some states allow husband and wife to split this return, an unfair advantage over citizens of other states.)

7) Repeal the tax on the telegraphs, telephones and leased wires --the last of the War-time transportation taxes.

8) Repeal the tax on admissions, mostly derived from neighborhood motion picture theatres.

9) Repeal miscellaneous nuisance taxes either because they are difficult to collect or because they are unnecessarily inconvenient for the public.

Effect on Revenue. The Government would lose and gain from these changes, according to Treasury estimates, as follows:

Decrease (in millions of dollars) Increase (in millions of dollars)

Reduction of 25% in tax on earned income: 97 ..

Reduction in normal tax 92 ..

Readjustment of surtax rates 102 ..

Capital loss limited to 12 1/2% .. 25

Interest and capital loss deductions limited .. 35

Community property amendment .. 8

Repeal of telegraph and telephone tax 30 ..

Repeal of admission tax 70 ..

Total 391 68

68

Net loss 323

Effect on the Public. The Mellon program is estimated to reduce income tax revenue $222,900,000. Of this reduction 65% will go to the incomes below $10,000 a year. Tie repeal of the telegraph and admissions taxes will lift another $100,000,000 from the tax bill of the general public. The income tax reductions for a married man with two children would be:

Income. Present Tax. Proposed Tax. Saving to taxpayer.

$4,000 $28.00 $15.75 $12.25

5,000 $68.00 38.25 29.75

6,000 128.00 72.00 56.00

7,000 186.00 99.00 87.00

8,000 276.00 144.00 132.00

9,000 366.00 189.00 177.00

10,000 456.00 234.00 222.00

Significance. Secretary Mellon said, in effect, to Congress: " Will you give a bonus to 4,000,000 veterans or will you cut the income taxes of 14,000,000 people?" Any politician's answer would be obvious were it not for the fact that as voters and lobbyists the bonus advocates have a much better organization than the taxpayer. But Mr. Mellon spoke loud enough for the public as well as Congress to hear. Much depends on the public's reaction. If the taxpayers shout louder than the bonus advocates, there may be no bonus.

President Coolidge did not make himself responsible for Mr. Mellon's proposal. It is obvious that he will avail himself of the public response in judging what to say to Congress on Dec. 3. If the President believes the public thinks well of lower taxes, the Coolidge war-cry in 1924 may well be: "No bonus, less taxes!"