Dan Throop Smith

Federal Tax Reform

Proposals for tax reform must be appraised against the subjective criteria of fairness and social policy regarding redistribution of income and wealth and the objec tive criteria of steady economic growth and administrative simplicity. Controversy over the individual income tax cen ters on the tax base and the rate structure. A fundamental change would involve the adoption of a comprehensive income tax base, including not only all capital gains but also various items of imputed income and even gifts and bequests. This concept of income breaks down the distinction between capital and income, would conflict with accepted concepts in all other fields, and would also have undesirable economic effects. High marginal individual income tax rates produce little revenue but distort decisions on personal activity and investment. Though some progression in rates is almost universally accepted as fair, confusion about the effect of rate changes at different levels has led to excessive top rates. Estate and gift taxes might be com bined into a single progressive transfer tax, but this would dis courage gifts before death and hence be undesirable. The inci dence of the corporation income tax is not known, but theorists and businessmen increasingly believe that it is shifted forward. As such, it is a capricious excise tax, and it also holds a price umbrella over less efficient producers. Partial substitution of a value-added tax would be a major reform. Under present inter national agreements, it could also improve the balance of payments.

Effects of Taxation on Individual Investment and Corporate Financing

THE purpose of this article is to indicate briefly some of the ways in which corporate and individual income taxation, operating both separately and in conjunction with each other, may be expected to influence the relative attractiveness to investors of different forms of investments and the relative costs to business of different forms of financing. The fact that income arising through corporate stock ownership is taxed once to the corporation and again to the individual to the extent that it is paid out in dividends, is frequently referred to as discriminatory and repressive double taxation. Much of the analysis which follows is related to the joint effects of the two forms of income taxation. Some of the probable influences on the costs of financing, however, are related almost entirely to the corporation income tax and are considered from that standpoint.1