Federal Income Taxes, Business Enterprise and a Depreciating Dollar

Abstract

P RIVATE ENTERPRISE HAS attained an advanced growth in the United States. In this, we are envied by much of the world, nor do we shrink from praising ourselves! The rest of the world does not envy us our tax laws. Our corporate taxes not only are about the highest, but personal taxes against the middle income brackets are nearly confiscatory and against the top income brackets actually confiscatory. A private enterprise economy thus labors under a settled contradiction: an anti-private enterprise tax structure. As compared with an effective peak personal tax rate, Federal and State combined, of 92 % (New York), the peak personal tax rate in the Soviet Union is 12%. Thus, while our own economy suffers a tax structure that is unsuited to private enterprise, the economy of the Soviet Union flaunts a tax structure appropriate to private enterprise. Nor is the comparison academic: in Russia, a growing class of scientists, engineers, industrial managers, writers, actors and other professional people has been moving into the salary group that, in these same professions here, faces a Draconian income tax. Plain economic facts, rates of pay and rates of income tax, may underlie a circumstance lamented often: the number of scientists and engineers has been growing only half as fast in the United States as in the Soviet Union! Steep as our progressive tax schedules appear, in actuality they are higher than they would seem at first blush. A steadily growing weight of income taxes has taken many individuals by surprise. There has been little general understanding of the process whereby, whenever wages, salaries and, with these, the cost of living and dollar incomes advance, taxpayers are faced with a more than proportionate rise of tax obligations. The process is a radical one, caused by the mountainous upward slope that, over the years, has been built into the structure of personal income taxes. For single individuals, the Basic Federal Income Tax of 20%r starts with incomes as low as $667 annually, far below the government's own estimated minimum for decent living. Making allowance for standard deductions, a 2 % added tax begins as soon as incomes exceed $2,891. The tax rate rises fast, and on incomes above $11,601, it is 38%c; on incomes above $19,601, it graduates to 53%; above $51,601, 75%; and above $101,601, 89%. On incomes above $201,601, a punitive top tax rate of 91% is levied. Unlike many countries, the United States does not, excepting for a limited allowance, credit the individual tax payer for corporate income taxes paid. Thus, the topincome dividend recipient may actually find himself in the somewhat unbelievable tax bracket of 95% plus! In this progression from an initial 20% personal Federal tax to a 91% peak tax, more than half the distance (47% ) is reached as soon as a single person has earned $15,601, or a married person (using the joint return privilege) $30,201. Despite the combined burden of ( 1) ever-steeper personal income taxes, and (2) and ever-rising cost of living, economic growth in disposable real income has been achieved. Many groups, however, have fallen far behind overall growth; and a few have been cruelly unable to keep up with the rise of living costs. The unlucky ones include, notably, pensioners and others dependent on relatively fixed incomes. Also, a surprising variety of others have been affected, notably successful professional people and successful managers of their own businesses. Of import to the growth of the United States economy, organizers and developers of businesses, such as those who accumulated savings in other periods, have found themselves, in the prosperous post World War II era, with little left over after providing for taxes and living costs. This cold reality throws a clear, if unpleasant, light on the shortage of capital now faced by so many small businesses. How, actually, has the impact of rising personal taxes been felt? The table below shows the long-term effects on real incomes of the rise in tax rates and the decline in the