The Income Tax And How It Grew


Yet exception continues to be piled upon exception. Every correction of unfairness seems to create the need for new adjustments. And so we have anomalies and mysteries. An apple farmer is taxed at ordinary rates. A Christmas-tree farmer files under the much more favorable capital-gains schedule. Sometimes Congress extends special tax courtesies to very important people. What then emerges in the form of legislation has all the appearance of being a general law. Actually it is tailored to fit only the precise circumstances of one taxpayer who doesn’t even have to be named in the law that is drawn just for him. Such a bil! was put through in behalf of Louis B. Mayer when he retired from Metro-Goldwyn-Mayer. It saved Mayer roughly two million dollars in taxes.


Not all loopholes exist for the benefit of the upper income brackets. Exemptions made for the aged and the blind, veterans’ benefits, union membership dues, income splitting for married couples—these are all loopholes even though they may advance socially approved goals. But the ones that count big in the bottom line are those thought up by resourceful professionals who serve well-heeled clients and pore over the IRS code and the decisions of the tax court the way good souls used to apply themselves to the Bible. One such lawyer, who invented a collapsible corporation (a device for transforming ordinary income into a capital gain through early liquidation of the corporation) claimed that the idea for his gimmick came to him under the most agreeable circumstances imaginable—while dining with Miss Rosalind Russell at Antoine’s restaurant in New Orleans.

So where does the Man in the Street find himself in the struggle among contending interests that seek to relieve themselves of the burden of taxation? Among these polarities he represents the great unorganized constituency, with no access to Congress or topflight advice. Knowing nothing of the fiscal charms of vicarious cattleranching or equipment-leasing, of tax-deductible trips to the Kentucky Derby or the Rose Bowl games, of cozy trusts in Liechtenstein, or the Mexican vegetable roll-over (not a health food or a diet supplement but a fancy tax caper), the wage earners and middling classes dig down and pay what the tax schedule says is due. “Tax shelters,” Senator Edmund S. Muskie observed recently, “only help those who have income to shelter in the first place.”

And there is more to it than that. Those whose main source of income arrives in the shaçe of highly visible salaries and wages must also make up the shortfall resulting from the tax write-offs of those who are deft in exploiting the gray areas. For it is the way of the world that

The rain, it raineth all around , Upon the just and unjust fellas , But more upon the just because The unjust have the just’s umbrellas .

So although every citizen is entitled to equity, it seems that some are entitled to more equity than others.

Dr. Joseph A. Pechman, director of economic studies at the Brookings Institution in Washington, rejects the loophole as an appropriate figure of speech to describe faults in the tax code and suggests rather that it is more like a fishnet because of what he calls Congress’ “cute provisions.” Dr. Pechman’s point deserves emphasis. Picketing the Internal Revenue Service’s offices and writing nasty letters to the commissioner are poorly directed exercises because it is Congress that makes the tax laws. The IRS is responsible for carrying out the intent of Congress, difficult though that may be to discern.

True, the field agent can be tough enough when he slaps a taxpayer with a big deficiency claim set forth in the dreaded formal “thirty-day letter.” Tax auditors, skilled at spotting a scheme, have ample weaponry at their disposal in the form of assessments, liens, or suits, and the IRS sometimes appears to the beleaguered subject of a tax audit more the adversary than the detached administrator concerned only with evenhanded justice. Yet the IRS does try to cultivate good relations with the public and this year—1973—has reintroduced the short form, io4oA, after several years’ absence. No less a personage than the commissioner himself banned the word “spouse” from the instructions because he thought it sounded like a water fountain; and a committee of fifth-grade teachers was recruited to help work out simpler definitions of such arcane terms as “adjusted gross income,” “low-income allowance,” and “percentage standard deduction.”