January 1, 1963

Reconstructing the Federal Tax System: A Guide to the Issues

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Project Note No. 50

Executive Summary The need for tax revision is compelling. The present tax structure is in large part a legacy of the depression of the 1930’s and of World War II. Since then economic conditions have changed profoundly. The objectives of public policy have also changed. Yet there has been little adaptation of the tax system. Nor, unfortunately, is there solid basis for expecting total tax loads to go down enough to bring relief automatically.

The present period is probably unique in the history a Federal taxation. There have been few times when the deficiencies of the Federal tax system have been as vigorously discussed. Seldom have hopes for tax reduction run as high. Never has the discussion of tax changes ranged over so many aspects of tax and fiscal policy.

While there is widespread agreement that substantial changes need to be made in the Federal tax system, there are important differences of opinion as to the measures that should be undertaken to improve it. To many the problem is simply one of reducing rates. Others would seek merely to snake certain revisions or reforms in the present methods of taxing individual incomes. Still others believe that a basic overhaul of the entire system and the adoption of new forms of Federal taxation are needed.

The purpose of this study is to contribute to public knowledge and understanding of the issues involved in reconstructing the Federal tax system. No attempt is made in this study to formulate or propose a tax program. The objective of this study is simply to provide information that will help interested citizens and public officials to judge the alternatives in Federal tax revision.

This study does not analyze all of the issues which may enter the debates on tax changes. Many of the issues were reviewed in more detail in the Foundation’s earlier studies of Federal Excise Taxes (1956), Are High Surtax Rates Worthwhile? (1957), Re-examining the Federal Corporation Income Tax (1958), The Federal Income Tax: Revising the Rate and Bracket Structure (1959), and Allocation of the Tax Burden by Income Class (1960).

The study is divided into three parts. Section I deals with the need for tax revision. Section IT sets forth the criteria for tax revision. The remainder of the study (Sections III-VI ) takes up in order the issues involved in revising the individual income tax, the corporation income tax, excise taxes, and other Federal taxes (principally estate and gift taxes and payroll taxes).

Tax Foundation wishes to acknowledge the assistance it received from Professor C. Lowell Harriss of Columbia University in the preparation of this study.

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