CHART XXII EFFECTIVE FEDERAL DEATH TAX RATES UNDER VARIOUS METHODS OF TRANSFER 1940 SOURCE: Treasury Department. See table 75, p. 410, infra. near future of applying to the capital market for fresh funds. These corporations have made themselves self-financing, that is, the allowances which they have set aside for depreciation and depletion plus their undistributed profits have been great enough in themselves to finance all their current peacetime requirements for expansion. The increase of this tendency may in itself be explanation enough for the steady decrease during recent years in the number of new corporate securities for large corporations. It is frequently alleged that the skyrocketing in surtax rates of Federal income and estate taxes has virtually confiscated the income of the upper bracket taxpayer. The statutory rates for the various revenue acts since 1913 have been plotted in chart XXIII for the individual income tax and in chart XXIV for the estate tax. The surtax rate fixed by the statute presents a somewhat misleading picture for it is not identical with the actual rate paid by the taxpayer. On incomes of between $1,000,000 and $1,500,000, for instance, the statutory surtax rate was 73 percent in addition to the 4 percent normal tax. By this it is meant not that the full income is subject to this rate but only the amount falling between $1,000,000-$1,500,000, while the sum under $1,000,000 is in varying degree subject to lower surtax rates. The Treasury Department has reported that the taxpayer in the $1,000,000-$1,500,000 bracket paid an effective tax rate in 1938 of 45.86 percent of his net income in contradistinction to the statutory rate of 73 percent on this same income. There is no denying that the present Federal tax system has interposed a number of barriers to private investment. The responsibility for this condition rests, however, upon the interacting relationship of high surtax rates and tax-exempt securities. Constitutional necessity is the commonly cited ground for continuing the present exemption of State and local bonds from Federal taxation, although recent decisions of the Supreme Court may question this. A commonly overlooked fact is the almost universal tendency of the various States to tax fully income received by their residents from securities issued by other States. Table 65 indicates that a taxpayer with a million-dollar income who received any income from 5 percent securities would receive no more net income from those securities than he would from holding exempt securities. On the other hand, table 66 shows that if this same taxpayer had derived his income out of 5 percent tax-exempt securities he would be in no less favorable a position than a holder of 23.15 percent nontax-exempt securities. The larger investors have consequently tended to favor the purchase of tax-exempt securities. Such would appear particularly to have been the case during the years when the undistributed profits tax was in operation, for the large taxpayer during this period could find no loophole in the law by investing in the stocks of those companies which had retained a high proportion of their savings. If the individual stockholder had no taxes to pay the company did. 300282-41--26 |