History of the U.S. Tax System
The following is an excerpt from the Ways and Means Committee's
report on the . The report reproduces
a June 19, 1935, message from President Roosevelt to Congress
advocating an inheritance tax, in addition to the estate tax.
Although the inheritance tax proposal was not adopted, the
message provides information on why the taxation of individuals'
estates was considered appropriate.
Message to Congress on Tax Revision
June 19, 1935
To the Congress:
As the fiscal year draws to its close it becomes our duty
to consider the broad question of tax methods and policies.
I wish to acknowledge the timely efforts of the Congress to
lay the basis, through its committees, for administrative
improvements, by careful study of the revenue systems of our
own and of other countries. These studies have made it very
clear that we need to simplify and clarify our revenue laws.
The Joint Legislative Committee, established by the Revenue
Act of 1926, has been particularly helpful to the Treasury
Department. The members of that Committee have generously
consulted with administrative officials, not only on broad
questions of policy but on important and difficult tax cases.
On the basis of these studies and of other studies conducted
by officials of the Treasury, I am able to make a number of
suggestions of important changes in our policy of taxation.
These are based on the broad principle that if a government
is to be prudent its taxes must produce ample revenues without
discouraging enterprise; and if it is to be just it must distribute
the burden of taxes equitably. I do not believe that our present
system of taxation completely meets this test. Our revenue
laws have operated in many ways to the unfair advantage of
the few, and they have done little to prevent an unjust concentration
of wealth and economic power.
With the enactment of the Income Tax Law of 1913, the Federal
Government began to apply effectively the widely accepted
principle that taxes should be levied in proportion to ability
to pay and in proportion to the benefits received. Income
was wisely chosen as the measure of benefits and of ability
to pay. This was, and still is, a wholesome guide for national
policy. It should be retained as the governing principle of
Federal taxation. The use of other forms of taxes is often
justifiable, particularly for temporary periods; but taxation
according to income is the most effective instrument yet devised
to obtain just contribution from those best able to bear it
and to avoid placing onerous burdens upon the mass of our
people.
The movement toward progressive taxation of wealth and of
income has accompanied the growing diversification and interrelation
of effort which marks our industrial society. Wealth in the
modern world does not come merely from individual effort;
it results from a combination of individual effort and of
the manifold uses to which the community puts that effort.
The individual does not create the product of his industry
with his own hands; he utilizes the many processes and forces
of mass production to meet the demands of a national and international
market.
Therefore, in spite of the great importance in our national
life of the efforts and ingenuity of unusual individuals,
the people in the mass have inevitably helped to make large
fortunes possible. Without mass cooperation great accumulations
of wealth would 'be 'impossible save by unhealthy speculation.
As Andrew Carnegie put it, "Where wealth accrues honorably,
the people are · always silent partners." Whether
it be wealth achieved through the cooperation of the entire
community or riches gained by speculationin either case
the ownership of such wealth or riches represents a great
public interest and a great ability to pay.
I My first proposal, in line with this broad policy, has
to do with inheritances and gifts. The transmission from generation
to generation of vast fortunes by will, inheritance, or gift
is not consistent with the ideals and sentiments of the American
people.
The desire to provide security for oneself and one's family
is natural and wholesome, but it is adequately served by a
reasonable inheritance. Great accumulations of wealth cannot
be justified on the basis of personal and family security.
In the last analysis such accumulations amount to the perpetuation
of great and undesirable concentration of control in a relatively
few individuals over the employment and welfare of many, many
others.
Such inherited economic power is as inconsistent with the
ideals of this generation as inherited political power was
inconsistent with the ideals of the generation which established
our Government.
Creative enterprise is not stimulated by vast inheritances.
They bless neither those who bequeath nor those who receive.
As long ago as 1907, in a message to Congress, President Theodore
Roosevelt urged this wise social policy:
"A heavy progressive tax upon a very large fortune is
in no way such a tax upon thrift or industry as a like tax
would be on a small fortune. No advantage comes either to
the country as a whole or to the individuals inheriting the
money by permitting the transmission in their entirety of
the enormous fortunes which would be affected by such a tax;
and as an incident to its function of revenue raising, such
a tax would help to preserve a measurable equality of opportunity
for the people of the generations growing to manhood."
A tax upon inherited economic power is a tax upon static
wealth, not upon that dynamic wealth which makes for the healthy
diffusion of economic good.
Those who argue for the benefits secured to society by great
fortunes invested in great businesses should note that such
a tax does not affect the essential benefits that remain after
the death of the creator of such a business. The mechanism
of production that he created remains. The benefits of corporate
organization remain. The advantages of pooling many investments
in one enterprise remain. Governmental privileges such as
patents remain. All that are gone are the initiative, energy
and genius of the creatorand death has taken these away.
I recommend, therefore, that in addition to the present estate
taxes, there should be levied an inheritance, succession,
and legacy tax in respect to all very large amounts received
by any one legatee or beneficiary; and to prevent, so far
as possible, evasions of this tax, I recommend further the
imposition of gift taxes suited to this end.
Because of the basis on which this proposed tax is to be
levied and also because of the very sound public policy of
encouraging a wider distribution of wealth, I strongly urge
that the proceeds of this tax should be specifically segregated
and applied, as they accrue, to the reduction of the national
debt. By so doing, we shall progressively lighten the tax
burden of the average taxpayer, and, incidentally, assist
in our approach to a balanced budget.
II The disturbing effects upon our national life that come
from great inheritances of wealth and power can in the future
be reduced, not only through the method I have just described,
but through a definite increase in the taxes now levied upon
very great individual net incomes.
To illustrate: The application of the principle of a graduated
tax now stops at $1,000,000 of annual income. In other words,
while the rate for a man with a $6,000 income is double the
rate for one with a $4,000 income, a man having a $5,000,000
annual income pays at the same rate as one whose income is
$1,000,000.
Social unrest and a deepening sense of unfairness are dangers
to our national life which we must minimize by rigorous methods.
People know that vast personal incomes come not only through
the effort or ability or luck of those who receive them, but
also because of the opportunities for advantage which Government
itself contributes. Therefore, the duty rests upon the Government
to restrict such incomes by very high taxes.
III In the modern world scientific invention and mass production
have brought many things within the reach of the average man
which in an earlier age were available to few. With large-scale
enterprise has come the great corporation drawing its resources
from widely diversified activities and from a numerous group
of investors. The community has profited in those cases in
which large-scale production has resulted in substantial economies
and lower prices.
The advantages and the protections conferred upon corporations
by Government increase in value as the size of the corporation
increases. Some of these advantages are granted by the State
which conferred a charter upon the corporation; others are
granted by other States which, as a matter of grace, allow
the corporation to do local business within their borders.
But perhaps the most important advantages, such as the carrying
on of business between two or more States, are derived through
the Federal Government. Great corporations are protected in
a considerable measure from the taxing power and regulatory
power of the States by virtue of the interstate character
of their businesses. As the profit to such a corporation increases,
so the value of its advantages and protection increases.
Furthermore, the drain of a depression upon the reserves
of business puts a disproportionate strain upon the modestly
capitalized small enterprise. Without such small enterprises
our competitive economic society would cease. Size begets
monopoly. Moreover, in the aggregate these little businesses
furnish the indispensable local basis for those nationwide
markets which alone can ensure the success of our mass production
industries. Today our smaller corporations are fighting not
only for their own local well-being but for that fairly distributed
national prosperity which makes large-scale enterprise possible.
It seems only equitable, therefore, to adjust our tax system
in accordance with economic capacity, advantage and fact.
The smaller corporations should not carry burdens beyond their
powers; the vast concentrations of capital should be ready
to carry burdens commensurate with their powers and their
advantages.
We have established the principle of graduated taxation in
respect to personal incomes, gifts and estates. We should
apply the same principle to corporations. Today the smallest
corporation pays the same rate on its net profits as the corporation
which is a thousand times its size.
I, therefore, recommend the substitution of a corporation
income tax graduated according to the size of corporation
income in place of the present uniform corporation income
tax of 13 3/4 percent. The rate for smaller corporations might
well be reduced to 10 3/4 percent, and the rates graduated
upward to a rate of 16 3/4 percent on net income in the case
of the largest corporations, with such classifications of
business enterprises as the public interest may suggest to
the Congress.
Provision should, of course, be made to prevent evasion of
such graduated tax on corporate incomes through the device
of numerous subsidiaries or affiliates, each of which might
technically qualify as a small concern even though all were
in fact operated as a single organization. The most effective
method of preventing such evasions would be a tax on dividends
received by corporations. Bona fide investment trusts that
submit to public regulation and perform the function of permitting
small investors to obtain the benefit of diversification of
risk may well be exempted from this tax.
In addition to these three specific recommendations of changes
in our national tax policies, I commend to your study and
consideration a number of others. Ultimately, we should seek
through taxation the simplification of our corporate structures
through the elimination of unnecessary holding companies in
all lines of business. We should likewise discourage unwieldy
and unnecessary corporate surpluses. These complicated and
difficult questions cannot adequately be debated in the time
remaining in the present Session of this Congress.
I renew, however, at this time the recommendations made by
my predecessors for the submission and ratification of a Constitutional
Amendment whereby the Federal Government will be permitted
to tax the income on subsequently issued State and local securities,
and whereby State and local governments will be permitted
to tax the income on future issues of Federal securities.
In my Budget Message of January 7th, I recommended that the
Congress extend the miscellaneous internal revenue taxes which
are about to expire and also maintain the current rates of
those taxes which, under the present law, would be reduced.
I said then that I considered such taxes necessary to the
financing of the Budget for 1936. I am gratified that the
Congress is taking action on this recommendation.
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