The New Argument

P: We cannot get prosperity if we put tax brakes on business before it gets into high gear.

P: I We cannot get our economic system to work at full speed so long as all business decisions are dominated by the question:

"What will be left after taxes?"

These are the two assertions which Beardsley Ruml last week used as corner stones of a new tax-reform plan.

Bulbous Economist Ruml of R. H. Macy & Co. and Danish-born Banker Hans Christian Sonne (pronounced Sonny) co-authored a 25-c- pamphlet (Fiscal & Monetary Policy) for the National Planning Association. Although the pamphlet attacks the whole problem of main taining high employment and vigorous private enterprise, its most striking features are its tax proposals. Economist Ruml slapped it down on the public counter at the psychological moment: just as Congress is preparing to take up the subject, just when many other people's ideas on the subject are coming to a boil.

The main Ruml-Sonne tax proposals:

P: Cut out Federal income taxes on corporations (except for a 5% franchise tax). Reasons: 1) because to tax income twice--once when it is received by the corporation and again when it is received by the real owner, the stockholder--makes no sense; 2) because it is unfair to tax millions of small stockholders at 40% and up on their corporate income when their in dividual tax bracket is much lower; 3) because high corporation taxes raise, some times pyramid, the cost of goods; tend to keep down wages, make investment so unattractive that much employment dies stillborn out of "tax considerations." To prevent use of corporations to avoid personal taxes, Ruml proposes a 16% tax on undistributed profits.

P: Forswear all Federal sales and excise taxes (except on tobacco, liquor and perhaps gasoline), because such taxes boost the price of goods and reduce sales. Such taxes, say Ruml & Sonne, are deflationary, lit the lowest incomes hardest.

P: Change social-security taxes so that old-age insurance takes in just what it pays out in good years and bad; so that un employment insurance pays out more than t takes in until employment is high, and then reverses the process in boom times.

P: Rely on the individual income tax (16% normal rate, up to 50% surtax) for most of the Federal revenue, because that tax interferes least with business activity. Increase its rates to reduce public spending power in boom times. Make it simple and let it stand until the U.S. changes its fiscal or social policy.

The main outlines of Ruml's new tax proposal are not original. They are unfamiliar to some politicians, but many economists (including those of labor unions) hold similar opinions. A particularly clear and careful examination of ideas of this type was put out last month by the Committee for Economic Development (Production, Jobs & Taxes, by Harold M. Groves, $1.25).

The Antis. Politicians who know no better will think that abolishing the corporate tax will let corporations get away with murder at the people's expense. Some politicians who do know better will fear that people are too ignorant and prejudiced to understand that this is not true. And Treasury experts seem generally blind to the economic consequences of the present chaotic tax system.

On the wave of Ruml-inspired tax consciousness, a group of St. Paul and Minneapolis businessmen, including John L. Connolly and Allen Wagner of Minnesota Mining and Manufacturing Co., last week presented a contrary plan to technicians of the joint tax committee of Congress.

They started with an assertion the opposite of Ruml's: "Relatively heavy corporate income-tax rates are not as harm ful to the private enterprise system as are heavy individual income-tax rates."

The Twin Cities diagnosis : the failure of business activity to expand is generally due to inability of individuals to accumulate capital, because of the large amount of their income that is taken away from them after receipt. The Ruml diagnosis (more generally accepted): the failure is due not to absence of capital, but to the fact that a heavy tax burden not only reduces earnings but cuts consumption by adding to the cost of products.

Twin Cities proposals:

P: Put the corporate income tax at 40% (but exempt 40% of dividends from individual income tax of the recipient).

P: Impose a general 5% sales tax.

P: Reduce individual income taxes to 10% normal tax and 50% maximum surtax (or alternatively, leave out the sales tax and have a maximum 65% surtax).

Both the Ruml plan and the Twin Cities plan it is estimated would raise $18 billion a year in tax revenue. But Ruml plans to raise this amount or more only when the national income passes $140 billion a year. So he counts on his individual income tax to raise 72% of the total. The Twin Cities plan proposes to raise $18 billion from a national income of only $120 billion. So it counts on its individual income tax--only 6% lower than Ruml's--to raise 28% of the total. A comparison of the two proposals (in millions):

Twin Cities Ruml Customs & Misc. 700 500 Estate & Gift Taxes 500 500 Excise Taxes 4,000 3,000 Corporation Taxes 5,000 1,000 Sales Tax 2,800 -- Individual Income Tax 5,000 13,000 Total $18,000 $18,000

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