College of William & Mary Law School

William & Mary Law School Scholarship Repository

William & Mary Annual Tax Conference Conferences, Events, and Lectures

1955

Basic Tax Issues

Roy Blough

Repository Citation
Blough, Roy, "Basic Tax Issues" (1955). William & Mary Annual Tax Conference. 645.
https://scholarship.law.wm.edu/tax/645

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 Basic Tax Issues

By Roy BLOUGH*

A belief which I am sure we all share and without which this con-
ference would be pointless is that tax policy can and should be better
than it is. I do not doubt that there is some friendly disagreement among
us over what should be regarded as "better" with respect to various pro-
visions of the law, but we would all agree that there ought to be some
changes.
How is a better tax policy to be achieved? Every year fine-sounding
pronouncements issue from one or more of the many existing economic
and political groups to the effect that there must be a thorough-going
reformation of the taxing structure. We must, we are told, cast off the
present faulty tax structure; we must wipe the slate clean and make a
fresh start. It is a stimulating thought: to clean the slate and make a
fresh start; but it is not the way tax policy is made. The tax system is a
going concern in which past, present, and future are part of a continu-
ing institution. Tax policy grows through a succession of changes in
the existing system. In almost every year there are changes, in some
years numerous changes, but rarely is there a really drastic upheaval.
Our most recent revolutionary change was the introduction of the pro-
gressive income tax in 1913, and even that did not appear so drastic at
the time as it eventually became, since it was only after World War I
began that the income and profits taxes assumed a dominating role in
federal taxation.
*Roy Blough: former Principal Director of Economic Affairs for the United
Nations, and now Professor of International Business in the Graduate School of
Business, Columbia University. Author of The Federal Taxing Process.
18 THE HISTORY AND PHILOSOPHY OF TAXATION

To be sure, efforts have been made at irregular intervals to clarify

and redefine the law within the general limits of its existing structure.
The most recent of these was made in 1954. As usual in such cases, that
revision left the tax law with many raw edges to be tucked back into
harmony with the general pattern before administration could proceed
smoothly and effectively.
The process of making tax policy is essentially the decision of a
succession of tax issues. By a tax issue I mean an aspect of the tax laws
on which two or more alternative courses of action are open, so that
a decision must be made. These issues concern all conceivable details.
In connection with the Revenue Act of 1954, the Congressional Joint
Committee on Internal Revenue Taxation has issued an analysis of Con-
gressional action with respect to various issues involved in the bill.
You may find of interest a classification of the various points included
in this analysis. There were according to my count 20 items on proce-
dure and administration, 20 items on liquor, tobacco, and other excise
taxes, i8 items on estate and gift taxes, and 134 items on income taxes.
This makes a total of 193 items on which new decisions were made by
at least one House of Congress. This does not include items that were
considered but did not pass either House.
This list of items indicates that the members of congressional com-
mittees and other officials directly concerned with tax policy face a
complicated and confusing task. Fortunately for the sake of our dis-
cussion, most of these details involve efforts to apply the decisions
made on a few basic issues to the multiplicity of situations presented by
our complex economy. For the purpose of this discussion I would like
to think of tax issues not with respect to whether they involve rates of
tax, exemptions, definitions of the tax base, etc., but with respect to the
dominant objective or consideration on which the tax proposal rests.
The groups of issues to which I shall direct my comments are those
designed to affect revenue yields, or to increase fairness and justice in
taxation, or to make taxes more convenient and simple for the tax-
payer and the tax administrator, or to grant or impose special economic
incentives.
The Revenue Goal
A basic issue which sets the stage for most other decisions concerns
the amount of revenue to be raised. Were it not for the need for reve-
nue, there would be no tax issues, since there would be no taxation.
"Taxation for revenue," however, should not be thought of as solely a
matter of supplying the government with spendable funds. Especially
in the case of the federal government there are sources of funds other
 BASIC TAX ISSUES

than taxation that could be drawn on freely if it were not for the ad-
verse economic effects of spending them. Taxation for revenue performs
the necessary function of withdrawing spendable funds from private
hands, thus preventing the inflationary results that follow when the
government and its citizens engage in competitive spending for the
same limited supply of goods and services.
When the volume of revenue to be raised increases more rapidly
than the national income, tax rates must rise, or new tax sources must
be tapped, or both. A consequence of rising tax rates is to accentuate
the importance of the decision of tax issues, since the line drawn be-
tween taxability and non-taxability becomes a matter of greater concern.
A consequence of tapping new tax sources is to enlarge the taxable
area, and thus to increase the number of decisions to be made.
What factors determine the amount of revenue set as the goal for
tax legislation? The chief factor in determining the amount to be raised
is the amount being spent. The two amounts, however, need not be
the same. The question whether they should be the same, and if not,
which should be the larger and by how nmuch, are major problems of
budget policy. Traditionally, "sound finance" called for an annually
balanced budget. There are still many people who maintain this to be
the only proper rule. But even they usually allow exceptions. Would it
really have been possible to finance World War II out of current tax
revenues? A few people answer yes to that question, but I wonder if
any of them would have been prepared to accept the levels of taxes that
would have been necessary to achieve the result, or the economic and
political consequences of taxes at those levels. The wartime deficit of
around 21 o billion dollars undoubtedly could have been kept smaller if
there had been the political will to do so. But that is a quite different
matter from no deficit at all.
Be that as it may, we have a federal debt accumulated in World
War I, during the depression years, during World War II, and in recent
years. With this large accumulated debt we face the following question.
Should our revenue goal be high enough to provide for the repayment
of that debt, and, if so, how rapid a repayment? One looks in vain for
any signs that a substantial degree of repayment is politically feasible,
while economically debt repayment could be harmful unless limited
to the changing capacity of the economy to absorb it.
This brings me to an approach to budget policy which has developed
over the last quarter-century and is now accepted by most economists,
and to an increasing extent by members of Congress and other policy
makers. I refer to the use of budget policy as an instrument for eco-
nomic stabilization. In brief, this policy calls for surpluses of revenues
20 THE HISTORY AND PHILOSOPHY OF TAXATION

over expenditures during periods of high prosperity and deficits during

periods of recession or depression. From the economic point of view
this doctrine seems firmly established, but its effective use depends on
a degree of political understanding and courage not yet evident. There
would seem to be substantial danger that the politically attractive half
of the formula-namely, that deficits are desirable in periods of de-
pression-is being accepted, while the other half, which calls for sur-
pluses in periods of prosperity, is being abandoned by our policy
makers, even though this side of the formula is reinforced by the need
to make a new start at retiring the debt and by the older doctrines of
"sound finance." The excuse often given for lowering taxes while run-
ning a deficit in a period of prosperity is that tax rates are too high.
A major difficulty with this argument is that you can search the annals
of this century, at least, without finding a period in which recognized
leaders were not giving a public airing to the same kind of statements.
Whatever the level of taxes, there are always many people who insist
that tax rates are so high as to have economically destructive effects.
One method of securing a fairly automatic budget surplus in pros-
perous times and budget deficit in depressed times is to adopt taxes that
have a highly fluctuating yield. For example, collections from taxes
that are measured by the net profits of corporations fluctuate a good
deal more than do collections from taxes that are measured by the gross
sales of corporations. Again, a tax imposed at progressive rates gives a
more highly fluctuating revenue than does a tax imposed on the same
tax base at a uniform or flat rate. The idea of actually preferring
fluctuating revenues to steady revenues is in sharp contradiction to the
more traditional idea that the more stable the revenue the better, since
it permits fiscal planning for an annually balanced budget. Responsible
financial officials undoubtedly feel much more comfortable with stable
revenues than with fluctuating revenues. Moreover, there is danger that
the high levels of revenue received in prosperity periods will encourage
tax reductions that are not justified by the average tax yield over a period
of years. Thus, economic considerations may come into conflict with
administrative and political considerations.
The revenue goal, then, gives us the frame within which we are to
paint the tax picture and determines the size of that picture. The size is
of considerable importance for all other tax issues. When a picture is
enlarged its defects become more noticeable. When a picture is enlarged
it also may become distorted; this is of particular importance in the tax
field. It is sometimes argued that a permanent tax structure should be
determined on "general principles," and that when more or less revenue
is needed all tax rates should be raised or lowered proportionately.
 BASIC TAX ISSUES

Proportional changes in tax rates may be practicable for minor changes

in the revenue goal, but not for major increases. Rate increases that are
workable and acceptable for one tax or taxing bracket would not be for
others. Diminishing returns set in at different points for different taxes.
Also a proportionate increase in rates might result in some persons
paying more than ioo percent of their income. Obviously any major
change in the revenue goal requires a complete reappraisal of the tax
rate structure.
Fairnessin Distributing the Tax Load
Many tax issues reflect the objective of making taxes more fair and
equitable. If the economic situations of all people were alike, virtually
any kind of tax or tax system would be as fair as any other kind, since
everyone would be treated the same under each. In fact, of course,
people's situations vary widely. Some of the differences reflect inequali-
ties of income and wealth. Other differences are in the occupations in
which people engage, in the forms of their investments, in the ways in
which they carry on business, and so on.
The tax issues that revolve around the fair distribution of the load
involve two major problems. The first is how to treat, for tax purposes,
people who have widely differing amounts of taxpaying capacity. It is
not sufficient to make some generalized statement, such as that everyone
should be treated equally. Indeed, it immediately appears that if persons
in an unequal situation are to be treated fairly they must be treated
unequally. This is the problem of progression in taxation. The second
problem is how to treat fairly people who have substantially the same
taxpaying capacities but who, because of one or more of the differences
I have mentioned, would not be taxed fairly without some special taxing
provisions.
Let me turn first to the problem of progression.
Progression
While the whole idea of progressive taxation continues to have
bitter enemies, progression is firmly established in the federal tax system
and in the public attitude toward federal tax policy. The extent or
degree of progression, however, is a continuing basic tax issue that is
reflected in many specific issues. Such matters as the size of the income
tax exemption, the progressive rate scale of the income tax, and similar
issues for the estate and gift taxes, are clearly in this group. Special tax
treatment of capital gains and the deduction of corporate dividends, as
well as the choice among excise taxes that fall on people at different
income levels, also often contain elements of the progression issue.
 THE HISTORY AND PHILOSOPHY OF TAXATION

The frequency and importance of the issues concerning the degree

of progression have given rise to attempts by scholars and others to
develop an objective mathematical measurement of the proper scale of
progression, mostly around the idea that taxes should be levied in ac-
cordance with "ability to pay." These efforts have not achieved their
goal of measuring "ability to pay," but they have popularized the con-
cept. "Ability to pay" is by far the most frequently used argument
urged upon policy makers in support of proposals for greater progres-
sion. The term is used also to support other kinds of tax proposals, how-
ever, and it has become little more than a slogan with the rather vague
intellectual content that the people who have the money should pay the
taxes. As used, it throws little light on the degree of progression that is
desirable.
It would, of course, be very convenient in making tax policy if
someone would be able to demonstrate and prove just what the extent
and pattern of progression should be in the tax system. People like to be
able to base their financial affairs upon something precise. The absence
of a formula of this kind, however, is no denial of the validity of pro-
gression. It merely puts that important issue in the same class with most
of the imponderables on which public policy, including fiscal policy,
must be based. It would, for example, be very convenient if there were a
demonstrably accurate formula for determining how much govern-
ment should spend on defense, or on welfare, or on any other function.
Axioms and considerations are developed, to be sure, but because of
conflicting interests and competing considerations what actually comes
out is a result of the political process at work. Great issues of public
policy are not scientifically determinable, and we must not expect easy
answers to them.
For an interesting examination of the history of thinking with regard
to progression I would refer you to the book by Professors Blum and
Kalven, The Uneasy Case for Progressive Taxation.' One of their find-
ings was that tax theorists, generally speaking, were opposed to progres-
sion until after the public had approved it and the policy makers had
introduced it into the federal tax structure. It would be unkind and
perhaps not true to suggest, as one might be tempted to do, that the
theorists then started to work to find reasons why they too should be
in favor of progression. The theories which they proposed are along
several lines. Perhaps the central arguments were based on theories of
benefit, theories of sacrifice, and theories of "faculty." As Blum and
Kalven point out, these theories have proved vulnerable to critical
analysis, although I am inclined to think there is more left of the argu-
ments than these authors appear to believe.
 BASIC TAX ISSUES

The disappointing state of progression theory grows out of two

factors. The first has been a failure to recognize theories consistent
with the idea that taxation in its very nature is political, that conflicting
interests and competing views of what is in the public interest are
inevitable, and that these are and ought to be part of the taxing process.
The second factor seems to have been a reluctance on the part of at
least some of the theorists to admit that there was any connection be-
tween progression and dissatisfaction with, or at least doubt about, the
desirability of the then prevailing distribution of wealth and income
before taxes. This unwillingness may have reflected not only a natural
reluctance to become involved jn a highly controversial issue of social
policy, but also a continuing faith that economic forces in the main
achieve an equitable distribution of income and wealth.
Without arguing the case here, I would suggest that the sacrifice,
faculty, and even benefit theories point to progression, but only in a
rather moderate degree. Progression to the extent that we have it in our
tax system appears to involve also at least a degree of skepticism that
the distribution of income and wealth resulting from the operation of
our economic system is demonstrably the best one. This does not neces-
sary mean that our degree of progression requires an active discontent
with the distribution of income and wealth that would exist in the ab-
sence of progressive taxes. There is an important distinction between,
on the one hand, deliberately using tax and expenditure measures to
reduce the incomes of people because these are deemed to be too high,
and on the other hand, looking around for the best place to impose taxes
that have to be levied on someone. It is this latter, not the former, atti-
tude that has chiefly been involved.
Undoubtedly many ideas and considerations are mixed up together
in the minds of anyone who has any views on the subject of progres-
sion. There are two major considerations-one of these having two
major subdivisions-that seem to have the most to do with attitudes
toward progression. The first, which I have been discussing, is the con-
sideration of what is fair and just. The concept of justice, of giving
people what they deserve, looks to the past to find the tests for social
action. There would seem to be at least two ideas for fairness that com-
pete with each other. On the one hand most people, including those with
large incomes, are conscious of the very large part that good fortune, or
chance, or providence, has played in their lives beginning with concep-
tion and birth. Most people would agree that to a considerable extent
they are what they are and where they are because of this chance factor
that is not the result of their personal merit. Recognition of that factor
cannot help but affect one's views toward tax progression.
24 THE HISTORY AND PHILOSOPHY OF TAXATION

On the other hand, social policy must rest on the assumption that
people can be induced to do socially desirable things and to avoid doing
socially undesirable things. The rewards and punishments of the eco-
nomic system have constituted a set of inducements. It is only fair that
those who have done the socially desirable things in response to these
inducements should be rewarded for having done so in comparison
with those who have reacted in socially undesirable ways. In other
words, it is not fair to hold out a carrot to a donkey and then not give
it to him when he has carried the load. There are interpretations of this
idea that would make impossible any change in governmental policy,
which is a palpable absurdity. There would seem to be little unfair-
ness, for example, in taking away gains in excess of the amounts of
anticipated gain that would have been necessary to produce the socially
desirable action. Moreover, it is important to remember that progres-
sive taxation and the possibility of higher rates being imposed at any
time have been one of the "rules of the game" for nearly two gen-
erations.
In summary we have two main ideas influencing our view regarding
the fairness of substantial progression, and they do not point in the same
direction.
Fairness and justice is not the only major consideration that affects
attitudes toward progression. Another is the expected impact of pro-
gression on the economy. This consideration looks to the future effects
of the progressive rate schedule. The most reliable motivation to pro-
ductive economic activity, and one that we have found to be necessary,
is the incentive of profit or other economic gain. In distributing the tax
burden policy makers must have in mind the kinds and amounts of
incentives that are necessary to bring forth the volume and quality of
economic activity required for satisfactory operation of the economy.
In addition to incentives, the pattern of taxes affects consumption, sav-
ing, and investment, and these also require consideration. At the same
time it should not be forgotten that a sense of fairness-or, more accu-
rately, a sense of unfairness-itself has a bearing on economic incentives.
If a large and important economic group-whether that group be at
the bottom or the top of the income scale-continues to feel deeply
that the tax system is grossly unfair, their economic behavior may be af-
fected adversely to the smooth and dynamic operation of the economy.
We are thus faced in progression with considerations which lead in
various directions. It is necessary for the public to weigh these consid-
erations and reach a reasonable decision. It is this kind of reasonableness
on which most great issues of government must rest for their proper
decision under our system of government. While, of course, most peo-
 BASIC TAX ISSUES

ple's conception of the public interest is greatly affected by their posi-

tion in the economic hierarchy, I think we have had adequate proof that
democracy need not break down through pressure for equalization of
wealth and income. Perhaps the large middle-class group, which, inci-
dentally, now includes many millions of working people, is responsible
for that hope. But in addition there seems good reason to believe that
people can be persuaded that their best interests lie in larger total pro-
duction rather than in a larger fraction of small production.

"Loopholes" and "Hardships"

The problem of progression, as I have indicated, is to deal fairly
with people whose economic positions are substantially unequal, having
due regard in this fair treatment to the requirements of a dynamic
economy. Another aspect of tax fairness, and the one which I would
suppose gives rise to the great majority of tax issues, arises out of the
desire to impose equal tax burdens on persons who are considered to
have substantially equal tax paying capacity, although the formal dif-
ferences in their economic positions require variations in tax treatment
in order to equate their taxes.
I shall mention only a few examples among the many cases of this
kind of problem. One is the equating for tax purposes of families having
different numbers of dependents. Obviously, some large families should
pay the same amount of tax as some other small families. The question
is, what pattern of exemptions and rates can achieve this result for
families in general.
Another example concerns the equating of incomes from various
sources. Some people receive income from their personal services, while
others receive income from their capital. The risks of life affect both of
these persons, but in different ways. There have been many efforts, thus
far not notably successful, to give some kind of special credit to persons
with incomes from personal services, as an allowance for depreciation
of their personal capital. Another case involves current income as com-
pared with capital gains. There are some aspects of capital gains which
require special treatment if tax burdens are to be equated. This has
proved to be a highly troublesome problem.
There is also the question of equating taxes on incomes received
from the profits of corporations as compared with incomes gained
through unincorporated businesses.
One of the most troublesome problems is that of equating taxes on
incomes that are received in a steady stream year after year, with taxes
on highly fluctuating incomes. In general, our present tax laws do not
equate for this difference-largely because of the practical difficulties
26 THE HISTORY AND PHILOSOPHY OF TAXATION

involved-but some special measures have been provided to take care

of certain outstanding cases that have been brought vigorously to the
attention of Congress-notably the spreading of incomes earned by
authors, inventors, and certain other groups over the period during
which the activity producing the income took place.
There is another kind of problem, or at least another set of ex-
amples, which fall in this general category of endeavoring to equate
taxes. For a variety of reasons, some income is taxed at full rates while
other income is taxed at lower rates or is exempt from taxation. Drawing
the lines between the particular items of income to be subjected to the
different rates presents a difficult problem of minimizing inevitable
unfairnesses. Everyone is conscious of what he considers unfair dis-
crimination against him in drawing the line. Everyone who thinks he
has a chance of success tries to have the relevant part of his income
classified as eligible for the especially favorable treatment. For example,
in the case of capital gains we have seen a considerable expansion in the
types of situation in which income is subject to the capital gains treat-
ment. Similarly, the favorable treatment of minerals through percentage
depletion has tended to spread far beyond the mineral resources to
which it was deemed appropriate to grant the favorable treatment in
the first instance. The extension of special treatment to additional situa-
tions is not a real solution, since it is likely to give rise to new re-
quests. One of the most disquieting things about our taxing process is
the apparent ease with which small taxpayer groups and even particular
taxpayers can get Congress to extend favorable treatment to them. For
the most part the public knows nothing about what is going on in these
matters, and usually it would not be in a position to take the time to
understand the facts, even if it did know what was going on.
Efforts to equate taxes by taking away the special treatment from
taxpayers who do not deserve it is commonly referred to as removing
loopholes, while extending special treatment to taxpayers who have not
received it and deserve to do so is referred to as removing hardships.
The line between opening new loopholes and removing hardships is a
narrow one, and people are likely to disagree as to which process is
happening in the case of any specific change in the tax law.
In referring to uniformity in taxation, it should be noted here that
uniform administration is no less important than equitable legislative
treatment.
Special Economic Incentives
Another basic issue, or basic objective of many specific tax issues,
concerns tax discrimination that is deliberately applied in order to pro-
 BASIC TAX ISSUES

vide special incentives. The repressive effects of all taxation make it

possible to encourage (or discourage) certain activities or organizations
by reducing (or increasing) the tax load on them while continuing to
apply the standard rate of taxation to other taxpayers. Encouragement
usually is provided through allowing a tax exemption or deduction, or
by applying a differentially low rate of tax. Among the examples of
features of the law which were adopted for incentive purposes or have
been stoutly defended on that ground are the exemption of churches
and philanthropic institutions, the, deduction of charitable contributions,
percentage depletion, low capital gains taxation, rapid amortization or
depreciation, and special treatment of income derived from business
abroad.
It is perhaps not surprising that many tax incentives-of the en-
couraging type, of course,-have been proposed. Indeed, I could not
say with assurance that any desirable economic activity or institution
has not been the subject of a tax incentive proposal, and I know of a
great many that have been. The argument for such proposals is a stock
one, combining an appeal to the unusual importance of the activity or
institution to the national economy, and to its lack of attractiveness in
the absence of the tax incentive.
Some writers on taxation condemn all special incentive tax measures
as being a violation of the principle that taxes should be for revenue
only. I find myself unable to accept either the principle or the conclu-
sion. Every tax system inevitably redirects economic activity to some
extent, and the redirection might better be along desirable than
undesirable lines. On the other hand, I am very dubious about the de-
sirability of most special incentive proposals for a number of practical
reasons.
In the first place, it is not possible to use successfully very many in-
centive devices at the same time. Since incentives inevitably compete
with each other, each new incentive measure tends to reduce the incen-
tive effect provided by measures already in the law. Moreover, as the
amount of tax base exempted or taxed at low rates increases, the basic
economic structure which does not receive an exemption must bear an
increasing load of tax, with harmful effects possibly greater than the
benefits that might be derived from the special incentive.
In the second place, the activities which are to be given special
benefits are often really no more important than other activities in the
economy. Their only special merit may be that they have enthusiastic
support by influential people who know how to get favorable legisla-
tive action.
In the third place, unless the proposed incentive legislation is very
 THE HISTORY AND PHILOSOPHY OF TAXATION

carefully drawn, and oftentimes even then, it will be possible for tax-
payers to derive the benefits without making the special economic con-
tribution for which the exemption or other incentive measure is in-
tended. Moreover, many taxpayers may already have been carrying on
the activity in question without needing any special benefit. It is ob-
viously a waste of public money to give them extra payment for what
they already have found to be profitable.
In the fourth place-and this particularly disturbs me-the whole
philosophy of these incentives is that one should achieve their results by
departing from uniform taxation. There is thus at least a prima facie un-
fairness about the resulting tax structure. In the beginning this unfairness
is not a matter of concern because the policy makers consider the pur-
pose to be achieved more important than any resulting unfairness. As
times goes on, however, memories dim. Then the taxpayers who did not
receive the special benefit are likely to press on grounds of fairness for
an expansion of the benefits to include them; and on the basis of experi-
ence they seem pretty likely to get it, too. If and as this happens, the
force of the stimulus diminishes and the cost to the public treasury is in-
creased. For all four of these reasons I suggest a high degree of restraint
in providing special tax incentives.
Tax Simplification
On at least one occasion the simplification of taxes was the basis for
a tax law. I refer to the Income Tax Act of 1944. The revenue acts of
1940, 1941 and 1942 had greatly increased the tax load and by drastically
lowering the exemptions had changed the income tax from a "class" tax
to a "mass" tax. In addition to applying the traditional income tax com-
plications to many millions of new taxpayers, efforts had been made to
ease the pain of higher rates by introducing a number of provisions
designed to decrease unfairness and prevent hardship. Each of these
provisions added some complication, although to be sure most of them
did not apply to the great majority of taxpayers. What broke the camel's
back was the skip-a-year plan provided in the Revenue Act of 1942,
which required the computation of two years' income and many special
calculations. The resulting very complicated return was to be filed in
March, 1944. Even before the filing date was reached, the protests reach-
ing the Congress were so numerous and vigorous that the taxing com-
mittees promised that once the Revenue Act of 1943 was out of the way,
a bill would be considered to simplify the income tax. On the instruc-
tion of the Committee on Ways and Means, the Treasury and joint
Committee staffs worked out the draft of a bill, in which a number of
provisions improving the fairness of the tax were dropped in the inter-
 BASIC TAX ISSUES

ests of simplicity. The Congress accepted this draft virtually in the

form in which it was presented to it. During and after the legislative
consideration of the measure many complaints were received that tax
fairness had been reduced, but these were met both in the Congress and
by the Administration with the statement that while unfortunately this
was true it was necessary in order to secure a simplified income tax.
With the passage of the years since then, while in certain respects
the taxpayers' problems of making and filing returns have been eased,
in other respects they have been made more difficult. The Revenue Act
of 1954, for example, added a number of categories of complication,
some of which apply to large numbers of taxpayers.
Perhaps there is a kind of cycle, with a phase in which tax fairness
has top priority with respect to changes in the tax law. After a time
the resulting complications may pile up to the point that simplification
becomes the dominant consideration, with fairness giving way to con-
venience. Just where we are now in this cycle and how soon the income
tax will again be found to be overloaded, with simplification again be-
coming the major consideration, remains to be seen. But unless greater
care to avoid complications is taken it seems probable that the wheel
will turn again-or perhaps it is the worm that will turn.
How Tax Issues Are Decided
Before bringing this discussion to a close, it is well that we consider
whether the operation of the process by which tax issues are decided
should give us confidence that the public interest will be promoted.
A good many ordinary citizens with no special knowledge on the sub-
ject seem to be frankly cynical about legislative action on taxation. I
hope my sample is not representative, since that is a most undesirable
attitude.
Whether or not we should be cynical we at least should not be
complacent. There are various factors that may impair the ability of
the taxing process to achieve the public interest. The only one I shall
go into here is the fact that the legislative process involves not only
elected representatives but a great body of legislative agents or lobby-
ists, as well as the direct intervention of taxpayers, operating to press
for action. This lobbying activity is inevitable and necessary. My criti-
cism is that the lobbying is not divided up in such a way that most
people are adequately represented. Most of the pressures on Congress
and the Administration come from the business community, or more
accurately from a small fraction of it.
Related to the lack of representation of great groups of people in
promoting their interests in the Congress is the undoubted fact that
30 THE HISTORY AND PHILOSOPHY OF TAXATION

great numbers of people are not aware of where their interests lie with
respect to many tax issues. Indeed, they are often not aware of the
existence of the issues. It is no wonder that the political process is not
entirely successful in dealing with the interests of the people.
While I am not happy about the way in which the taxing process
sometimes works-or does not work-I would like to stress that tax
issues must be decided in the political arena. Some people seem to be-
lieve that tax policy can be made a science and that with competent
"experts" it is possible to determine scientifically what the proper tax
structure and rate pattern should be. Such ideas have not always been
discouraged by economists, and they have been stimulated and encour-
aged by people who claim that their own tax proposals are scientific,
in the hope of persuading policy makers to adopt them. But it is funda-
mental that science has no way of determining what kind of a society
people ought to prefer and accordingly cannot determine what policy
ought to be.
This does not mean that scientific study has no part in the policy
making process. There is great need for such study. Many mistakes in
policy decisions grow out of ignorance regarding the effects of various
tax measures and regarding what would be in the best interest of dif-
ferent groups of people. What is needed is an integration of the scien-
tific approach-that of bringing to bear more adequate knowledge-
into a process which gives full recognition to that play of political forces
on which in a democratic society we must rely for the determination of
tax policy.
One final word. I have indicated my belief in the inevitability and
the desirability of the decision of tax issues on the basis of the operation
of political forces, given a well-informed electorate and Congress. But
legislation is not all there is to taxation. The administrative and judicial
sides are also highly important-in bridging gaps in the legislation, in
applying the law to the specific situation of each taxpayer, and in fully
and uniformly enforcing the law. The play of political forces and politi-
cal pressures is completely out of place in the administrative and judicial
stages of taxation, and any signs of the political factor should give rise
to the most vigorous reaction by tax students and tax practitioners alike.
The proper forum for political action is the legislature-and also the
executive branch in so far as it participates in the legislative process. To
extend the area of political action to the administrative and judicial
branches of government can only result in undermining and destroying
the whole policy-making process.