Compromises on Taxes

After weeks of skirmishing between industry pressure groups and Government economists, the House Ways and Means Committee last week began reporting out its reworked versions of the Kennedy Administration's 1962 tax proposals. In most cases, Ways and Means gave the President only half a loaf. Some of the compromises:

> Businessmen will have to produce solider proof that expense-account spending is "directly related to the active conduct" of their business--but the Administration's proposal to put fixed ceilings on expenses was scrapped.

> Corporations will be entitled to a tax credit amounting to a flat 8% (4% for public utilities) of what they spend on plant modernization, a simplified version of the Administration's 1961 plan to spur capital spending.

> Mutual fire and casualty insurance companies must now pay taxes on their premium income as well as on their investment income. This is expected to increase their taxes by $42 million a year. $8 million less than the Administration had hoped for.

> To recover an estimated $600 million a year in dodged taxes, personal income tax on corporate dividends, savings account and bond interest will be withheld in advance.

Most of the heat generated during the hearings concerned the taxes paid by the nation's 6,300 savings and loan associations and 515 state-chartered mutual savings banks. Neither the mutuals nor the S.& L.s paid any federal income tax until 1952. Since then, they have been allowed to accumulate a tax-free bad-debt reserve of 12% of deposits. By putting most of their earnings into this reserve, the fast-growing S. & L.s managed to pay a total of only $7 million in taxes last year.

Competing commercial banks (which have a tax-free reserve averaging only 2 1/2% of loans) want the S. & L.s to ante up more. Ways and Means compromised on a formula that offers the associations a choice: they can either put an amount equal to 3% of their net loan increases each year into the bad-debt reserve and pay taxes on the rest of their earnings, or they can pay taxes on 40% of their net income. Either way, the Treasury expects to get about $200 million a year in additional taxes. An earlier Administration proposal would have increased the associations' taxes by an estimated $365 million. Said one relieved S. & L. official: "We've got to pay some taxes to make the public happy, and this is a formula I think we can live with."

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