Editorial: Beware the tax promiser
Pre-election promises have been giving many people the impression that a tax holiday is just around the corner. This impression has been bolstered by the fact that several state legislatures have approved a proposed constitutional amendment limiting federal income, gift and estate taxes to 25 percent. A surge of optimism about the possibility of lower taxes has also followed the recent publicity given to post-war plans calling for dramatic slashes in tax rates.
Don’t be misled. Campaign statements on taxes are just that, whether they come from Republican or Democratic sources. There is about as much chance of taxation being held to a top limit of 25 percent as there is of a law forbidding the thermometer from going above 80 degrees.
Similarly, post-war plans calling for drastic tax reductions are just wishful thinking. Any reductions in general tax rates would undoubtedly force the government to use a general sales tax as a substitute source of revenue. But even most proponents of a sale tax during wartime would shy away from it in the post-war period when the emphasis probably will be on spending rather than saving.
Although no reduction in personal tax rates can be expected for some years, it is a safe bet that business taxes will be softened in the effort to shift American industry from war to peace with as little dislocation and unemployment as possible.
The present excess profit tax probably will be eliminated. And although industry in general has been able to show a substantial net profit even after this drastic tax, a major business complaint is that the tax laws have not allowed companies to set aside enough money as a reserve to meet the contingencies of the post-war period. For instance, owing to wartime conditions company may have had to put off necessary repairs to its factory buildings, or the job of replacing war machinery with the machines it uses for peacetime production may be very expensive.
The Treasury says that the present tax law does recognize this problem, if only indirectly. For instance, when a company has a bad year and shows a loss it can claim a refund from the Treasury of part or all of the taxes it paid in years when it showed a profit. Or, in certain cases, the company waits until the next year it shows a profit and then claims a deduction in its taxes for that year.
But these “carry backs and carry forwards,” as they are called, are limited to a two-year period. This means that no matter how much tax a company has paid in previous high-profit years, it cannot later claim a tax refund if the profit period is more than two years in the past. Similarly, it can claim no reduction of taxes in a good year unless its loss period occurred within two years of that time.
Probable elimination of the excess profits tax and existence of even the two-year carrying back privilege will be a financial boon to many companies. There is also a strong likelihood that corporate tax rates I general will be decreased in the government’s attempt to stimulate business activity after the war.
It is in line with this primary goal that various “incentive taxation” plans are being urged. The idea is to determine from the point of view of the national interest what overall goals the country deems desirable – for instance, maintaining as high a level of production as possible and providing as many jobs as possible. The tax structure would be so arranged that companies that best fit themselves into this national design would get certain tax advantages and benefits denied to other companies.
Reduction of corporation taxes and some “incentive plan” may give some post-war relief – but beyond that there’s little hope in sight for a real tax cut. Campaigners who promise it the coming year won’t be able to make good and will be misleading the voters.