needed. From a stabilization standpoint there is no point in substituting a corporate rate reduction for the investment credit. As to future growth and the relative balance between consumption and investment, we can afford to wait a bit until the present inflationary pace really wears away to see if capital formation will then lag. If it does, a resort again to an investment credit can be more meaningful than corporate rate reduction. There is no point now in choosing weaker devices on the assumption that capital formation may later need strengthening. Conclusion The Ways and Means Committee and the House have taken a significant step forward to the goal of a fairer and simpler Federal income tax. It is now up to this Committee and the Senate to make that step a decisive one. The House Bill is a fine structure to build upon. It can be strengthened in a number of ways and these weaknesses should be corrected. its many, many strengths should be retained. But 33-758 - 69 No. 11 - 4 Statement By Stanley S. Surrey before the Committee on Finance U. S. Senate on The Tax Reform Act of 1969 H. R. 13270 September 25, 1969 I appreciate the opportunity to appear before this Committee in the Hearings on the Tax Reform Act of 1969. The Tax Reform Act of 1969 is a very significant step forward in the accomplishment of the vital task of reform of the Federal tax structure. It is not the end of the road, but it is a major beginning that takes us a considerable way forward. In the area of tax reform, major beginnings are certainly major events. Major tax bills are bulky, complex documents replete with technical language. It is often difficult to obtain an overall perspective regarding the basic aspects of such a bill the significant changes that are involved, the degree of progress or retrogression in improvement of the tax structure, the swing of the pendulum toward tax simplicity or tax complexity. I believe it would be helpful in obtaining perspective on the effectiveness of this bill in achieving tax reform to consider first the dimensions of tax reform that is, what are the problems or issues of tax reform and then to see what the bill actually does in meet - ing those problems and issues. Individual Income Tax I will start first with the individual income tax. A consideration of the dimensions of tax reform under the individual income tax indicates that several distinct factors are involved. Some factors are paramount for one group of taxpayers, while other factors predominate for the remaining groups. These different factors, of course, call for different approaches. Hence, I will separate these considerations into three broad taxpayer classes low income, middle income and high income and discuss the factors that are relevant to each group and the pertinent provisions of the House Bill. - Low-Income Taxpayers - The significant factor regarding low-income taxpayers is that the individual income tax is imposed on people whose incomes fall below the poverty line, and also bears heavily on those close to the line. Since that line is intended to measure the levels of income, by family size, which are barely sufficient to provide the necessities of life, there is justification for concluding that the income tax should not reach down below those levels. While poverty line definitions are to some extent arbitrary, so also is any cut-off utilized under the income tax, and the poverty line classification can well be used as a presumptive point for fixing the line of exemption from the income tax. The present income tax exemption levels, based on the combination of the $600 per person exemption and the minimum standard deduction, are considerably below the poverty line levels, especially for single persons and married persons with no or few children. Thus, a single person with income above $900 is subject to income tax, and yet the poverty line for single persons is around $1700; a married couple pays tax if their income is above $1600, whereas the poverty line is about $2200. There are about 2.2 million families in poverty who are now subject to tax. The income tax change best designed to relieve this situation is to increase the present minimum standard deduction. Revision in the amount of that deduction will concentrate the revenue involved in the lowest income group and among single persons and married persons with small families, where, as stated above, we find the widest disparities between the present income tax exemption levels and the poverty line. No other tax change increase in personal exemption, decreases in tax rates, etc. will accomplish this purpose with the same effectiveness. The revenue cost depends on the amount of increase that is made in that deduction and the manner of its application. The House Bill fully meets this problem of tax reform for the low-income taxpayers. It raises the present minimum standard deduction from $200 (plus $100 for each personal exemption) to $1100 per taxpayer, effective in 1971. (The name is changed from "minimum standard deduction" to "low income allowance.") The effect of the change is to place the start of the income tax at essentially the poverty level thus fully exempting those below that level and to give substantial tax relief to low-income families in the area above the poverty level. This approach is far preferable to that contained in the earlier version of the low-income allowance (H.R. 12290) which involved a scaling-down of that allowance, so that it eventually disappeared and only the present minimum standard deduction remained. Such a scaling-down is retained in the current House Bill for 1970 and a modified permanent scaling-down has been recommended to your Committee by the Treasury Department. But a scaling-down approach is decidedly undesirable in meeting the problems of low-income taxpayers. While the initial allowance does exclude those below the poverty level from the income tax, the scaling-down has the effect of providing less relief to those low-income families above the poverty levels and far less overall relief to the lowest brackets than does the undiluted approach taken in the House Bill for 1971. Thus, that Bill achieves $2.6 billion of tax relief for these low-income families as compared with only $625 million under the scaling-down approach in 1970 (the original Treasury approach) and only $920 million under the latest Treasury scaling-down proposal. The scaling-down approach also has the decided disadvantage and unfortunate effect of providing a high rate of tax for all low-income taxpayers who remain subject to tax. Thus, in 1970, under the general rate scale in the House Bill (which is the same |