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Debate over the Mellon Tax Reduction Proposal of 1927

THE BATTLE FOR AND AGAINST heavy tax-reduction, which began November 2, when Secretary of the Treasury Mellon recommended a reduction not greater than $225,000,000, "will be between financial and corporation giants," observes Robert Barry, Washington correspondent of the New York Evening World. Unlike the 1921, 1924, and 1926 tax-reduction battles, Mr. Average Citizen, who is found in the lower brackets, will gain only indirectly from whatever slashes may result from the Mellon recommendations. He simply is not in the picture this year; the issue is not whether there shall be relief for the small income-tax payer, but what the amount of the reduction in the higher levels shall be.

HOW THE NEW TAX RATES WOULD COMPARE WITH THE OLD Basing their argument primarily on the ground that the Treasury has in the past consistently underestimated its revenue, the Democrats, says the Springfield Union, "are virtually united in proposing a total reduction of $400,000,000, or even $500,000,000." Mr. Mellon's reply to this is that such a heavy cut would threaten a budget deficit in the fiscal year 1929; that a tax policy must be based, not on past revenues, but on those likely to be available in the future. The Secretary of the Treasury, remarks the New York Sun, "arrives at his figures by simple arithmetic—a science all too unfamiliar in legislative halls."

Chairman Green, of the House Ways and Means Committee, following the hearings between November 2 and 12, hopes to have the tax-reduction bill ready for introduction with the opening of Congress, and passed by the House before the holidays. What Congress must decide, we are told, is the amount of the cuts which can be made without leaving a deficit. "Curiously enough," notes the Providence Journal, "the United States Chamber of Commerce has a tax-curtailment program that more closely resembles the Democratic proposals than it does the Administration's tentative outline." This outline, as submitted by Secretary Mellon and summarized by the Washington correspondent of the New York Times, contains these five basic recommendations:

  • "1. Reduction of the corporation tax from 13.5% to 12 per cent., involving a revenue loss of $135,000,000.
  • "2. Permitting corporations with net income of $25,000 or less, and with not more than ten stockholders, to file returns and pay the tax as partnerships or corporations, at their option. This would mean a reduction of $30,000,000 to $35,000,000.
  • "3. Readjusting the intermediate brackets of the surtax rates, applying to incomes between $18,000 and $70,000 and involving a revenue loss of $50,000,000.
  • "4. Repealing the estate tax, involving a loss of $7,000,000.
  • "5. Exempting from taxation the income from American bankers' acceptances held by foreign central banks of issue."
Altho admitting that there had been underestimates by the Treasury for several years, Mr. Mellon stoutly defended his department by saying that this had not occurred as the result of any deliberate intention or policy, but because it has been impossible to foresee the increase of the special revenues. He further declared that—

"Financial policy, to be sound, must not be based upon the experience of a single year. We must not be unduly imprest by the revenue results of a year of unusual prosperity or a year of large receipts from temporary sources.

"Leaving out of consideration the fact that the 1928 surplus largely exceeds the prospective surplus for 1929, a reduction in revenue which would be fully justified if the present year were considered alone, would almost certainly produce a substantial deficit in the fiscal year 1929.

"We have eliminated most of our excise taxes. There remain for revenue purposes the excise tax on tobacco and automobile sales, the admissions tax, and a few stamp taxes. All of these should be retained in the interest of a well-balanced tax system.

"Corporations last received relief from taxation in the Revenue act of 1921, which repealed the excess profits tax, and even then the income-tax rate was increased. Since that time, while other classes of taxpayers have been benefited either by the repeal of war taxes or the sharp reduction of wartime rates, corporations have continued to bear a heavy burden. The time has come to revise the corporation tax rates downward.

"The Federal appropriation for good roads in the fiscal year 1928 runs as high as $71,000,000, and in the fiscal year 1929 will be $75,000,000. These expenditures by the Government are for the direct and immediate benefit of automobile owners. They should make some contribution in return.

"The automobile is a semi-luxury article of such wide-spread use that it furnishes a broad base on which to apply a low tax. The rate being low, there is no appreciable hardship to the taxpayer; the base being broad, the tax is a good revenue producer. Unless we are to rely almost exclusively on direct taxes paid by a few and are prepared to see our Government supported, not by the entire body of our citizens, but by a limited class, this is the kind of tax which should be retained.

"So far as expenditures are concerned, the estimates have been furnished by the Bureau of the Budget. It should be remembered that estimates do not include any expenditures that may be incurred by reason of new legislation. The Treasury believes that tax-reduction should not in any event be in excess of approximately $225,000,000."

The Treasury's tax-reduction proposals will be more fully discust later. That there will be considerable criticism of the Mellon proposals is indicated by the fact that Representative Garner and Senator Simmons, Democrats, are unlimbering their big guns with which to shoot holes in the Administration program. On the whole, however, Democratic dailies such as the New York Times and World, and the Baltimore Sun seem to favor the Mellon program. "The Treasury's plans," points out The Times, "are in general to be commended. They are conservative and in accord with the views of sober business men and economists." In this two widely read Republican papers—the Washington Post and New York Herald Tribune—concur. Says the New York daily: "The Mellon proposals are conservative, and conservatism is better than overboldness just now, in view of the fact that Treasury surpluses are applied automatically to extinction of the public debt."

Source: Literary Digest - November 12, 1927