porated in the tax system many desirable administrative and structural changes, such as the establishment of a Board of Tax Appeals. Some improvement may be expected from these changes. It will be possible to expedite the settlement of contested cases and thereby to relieve the taxpayer of the fear of unknown future assessments. But these changes, while excellent in themselves, do not go to the heart of tax reform. They fail entirely to take into account the defects of a system which seeks to build a fence around wealth in the form of high surtaxes and at the same time provides an easy means of escape through investment in tax-exempt securities.

Such a system has two thoroughly undesirable effects: it both encourages tax avoidance and discourages business enterprise. The system itself is still fundamentally the same as it was during the war; and the real question involved in tax reform is whether we wish deliberately to adopt as a permanent peace time policy a tax system built up hurriedly during the war to meet conditions which no longer exist.

In tax reform there are two main objectives: first, to make the income tax effective and thereby to insure its preservation as a permanent source of revenue for the Government; and second, to work out a basis of coöperation between the Federal Government and the various States, by which overlapping taxes shall be eliminated.

There is only one way to make the income tax effective. That is, by making tax avoidance unprofitable. We have a blind faith in this country in the miraculous power of legislative action. We pass an act in order to achieve certain desired ends and then shut our eyes to the fact that the law is being evaded on every side. Too much evasion will destroy respect for the law and in the end will bring it into contempt.

That is the situation which confronts us today with regard to the graduated income tax. We have a law which levies rates so high as to make tax avoidance worth while. At the same time, we provide legal means of escape by which the largest taxpayers can avoid all payment of taxes.

There are in this country today over $13,000,000,000 of taxexempt securities, issued by States, counties and municipalities,

and this amount is steadily increasing each year. It is only necessary for the rich man to invest in these securities and he need pay no income tax at all. Wealth is more and more tending to do this, and to leave the tax burden to be borne by the smaller taxpayer and by the man engaged in active business, whose capital cannot be transferred to tax-exempt investments.

The strange anomaly is that the very persons who champion high surtaxes as a means of taxing the rich are most insistent upon holding open the door of escape provided by tax-exempt securities. It is all done in the belief that some right-or advantage of the States is involved. Tax-exempt securities represent largely public improvements; and public improvements, of course, are vitally necessary, particularly in the South and West, where increase in land values follows in the wake of better roads and schoolhouses. But public improvements do not necessarily depend upon the tax-exempt feature. Before the imposition of high surtaxes, sound State and municipal bonds were readily absorbed in the immediate locality and by insurance companies, trust funds and other conservative investors, who no longer cared to take the risk involved in business enterprise. These bonds would continue to find a wide market among such investors, regardless of the tax-exempt feature.

Men in active business, before the days of high surtaxes, did not seek this form of investment; and it is their present tendency to do so which is giving cause for concern. It is far more necessary that capital should seek business investments and build up mills, railroads and other productive enterprises, rather than lie inactive in municipal and county bonds. At the present time, however, on account of the combination of high surtaxes and tax-exempt securities, capital is more and more tending to leave business and go into less productive forms of investment.

There are only two remedies for this situation. The first is to pass a Constitutional Amendment prohibiting future issues of tax-exempt securities. Secretary Mellon and the Treasury have frequently recommended the passage of such an amendment; and, as Mr. Mellon remarked in one of his recent speeches, "this is the strongest possible test of whether it is really desired to make wealth bear its share of the tax burden. All that is necessary is to

close the door and thereby cut off this inviting avenue of escape

The States would give up no material right in supporting a Constitutional Amendment such as was passed by the House of Representatives a year ago, giving reciprocal authority to both State and Federal Governments to tax future issues of securities by either Government. It is in the power of the Federal Government now to issue its own bonds free of Federal taxation and thus largely destroy the artificial value attaching to State and municipal securities on account of their exemption from Federal taxes. But there is no immediate prospect of a Constitutional Amendment being passed; and even if such an amendment were passed it could not affect the billions of dollars of securities already issued. Under these circumstances there is obviously only one course to pursue that is to reduce surtaxes to a point where capital will find it worth while to remain in active business and pay the tax rather than go into tax-exempt bonds.

Taking up the question of rates: it may seem paradoxical, but it can be mathematically demonstrated, as the Government has found to its sorrow, that excessively high rates produce less revenue than lower ones. In taxes, just as in selling, there is a point of maximum return. If the selling price is too high, fewer articles are sold; if it is too low, sales increase but profits diminish. As everyone knows, the number of sales increases every time the price of the article is reduced, which is, of course, easy enough to understand. But there is a point on the lower side of the profit belt, beyond which prices cannot be reduced without too great a loss of revenue; and so it is with taxes. We cannot levy rates below the point which will produce revenue sufficient to run the Government.

What has been the Government's experience in fixing rates? In 1916, under a maximum surtax of thirteen per cent., the total amount of incomes of $300,000 or over reported for taxation was $992,000,000, and the Government collected $81,000,000 in surtaxes. In 1921, under a maximum surtax of sixty-five per cent., the total amount of income of this class fell to $153,000,000 and the Government collected $84,000,000 in surtaxes. In 1922, the surtax was reduced from sixty-five per cent. to fifty per cent., and

what happened? The amount of income reported for taxation by the largest taxpayers rose to $365,000,000 as compared with $153,000,000 the previous year, and the Government collected in surtaxes $111,000,000 under the lower rates as compared with $84,000,000 under the higher rates. In 1923, the amount of income reported for taxation by the highest brackets increased to $371,000,000 and the amount of tax collected was $93,000,000. This tax was realized after allowing the retroactive reduction of twenty-five per cent. authorized in the Revenue Act of 1924. Without such reduction there would have been collected taxes amounting to $124,000,000.

Under the Act of 1924 the maximum surtax has been reduced to forty per cent.; and, while the reductions granted are not enough to bring wealth as a whole back under taxation, it may be expected that there will be a still further increase in revenue from the higher brackets. Figures such as the above are convincing evidence that in taxation it is not always the highest rates which bring in the greatest revenue.

What is the situation as regards the rates now in effect? Under the present law, the possessors of the largest incomes are taxed as much as forty-six per cent. on the higher brackets. It is true that not a very great number are actually paying so much. But at least the law imposes a total maximum tax of forty-six per cent. To the average man that seems fair enough. He reasons that a man with an income of $400,000 or $500,000 a year can afford to pay nearly half of it as taxes and still eke out not too miserable an existence. But regardless of whether the theory is right or wrong, it works out in practice so that the Government fails to get its share of the income. In order to avoid taxes which he considers excessive, the man of large wealth is investing more and more in tax-exempt securities and taking advantage of the other means of avoidance made possible under the law. It is just as well to realize that capital, no less than labor, cannot be forced to work unless it is profitable to do so; and under the present high surtaxes, capital frequently does not find it worth while to take a chance.

A man of large income has the choice of investing in a taxable or a tax-exempt bond. If he is subject to the highest surtax, he

finds that he must receive at least eight per cent. from the taxable investment to equal the net return of four and a half per cent. from a tax-exempt bond. There are no bonds of sound security paying eight per cent., and very few safe business investments which insure such a return on the capital invested. The consequence is that capital is attracted to the tax-exempt investment and many men of large income pay no taxes. If, however, the maximum normal and surtax were reduced to a total of twenty per cent., a taxable business security need yield only about five and a half per cent. to equal the net return of a four and a half per cent. municipal bond.

It is easy to see what would happen under such circumstances. Capital would find it more profitable to invest in business and pay a moderate tax than to go to the trouble, as at present, of avoiding taxes. This is the reason for advocating a reduction in the surtaxes; and there can be no sound and permanent reform of the tax system which ignores the necessity for such reduction.

The second objective in tax reform involves a revision of the death taxes. Both the Federal and the State Governments are attempting to exploit this field of taxation. Under our dual form of Government, there has grown up in this country a curiously complicated and haphazard system of taxes, with the result that double taxation obtains in the United States to a greater extent perhaps than anywhere else in the world.

The present situation is a striking example of the lengths to which competing jurisdictions will go in the effort to extract the last dollar from resident and non-resident taxpayers in the form of death taxes. No attempt is made at reciprocity between the States, nor is any effort made to levy taxes according to some uniform principle. On the contrary, many States use both the situs of the property and the domicile of the decedent as the basis of liability to taxation. The result is that estates with widely scattered assets are frequently subjected to overlapping and confiscatory taxes, thus bringing about a depletion of capital which must ultimately have a serious effect on the country's development.

It is possible for estates, under some circumstances, to be taxed more than one hundred per cent. of their value. This, of course, does not often happen; but under our present laws it is entirely