Exemptions from Income Taxation

Report Outline
Limited Scope of Roosevelt's Tax Message
Partial Tax Immunity of Public Employees
Tax Exemption of Government Securities
Revenue Losses from Tax Exemptions
Special Focus

Limited Scope of Roosevelt's Tax Message

The Letter of Secretary Morgenthau which President Roosevelt incorporated in his tax-evasion message of June 1 noted the Treasury's surprise and disturbance over failure of income-tax receipts to measure up to budget estimates and, attributing that failure to widespread resort to evasive devices for reduction of tax liability, advanced the opinion that “if tax evasion and tax avoidance can be promptly stopped through legislation and regulations resulting from a special investigation, a very large portion of the deficiency in revenues will be restored to the Treasury.” In asking that Congress enact legislation at this session aimed to plug loopholes already disclosed, and that it make provision for a further investigation to provide the basis for more comprehensive corrective legislation at the next session, neither the President nor the Secretary of the Treasury mentioned two broad classes of income which at present largely escape federal taxation: (1) Compensation paid to state and local officials and employees, and (2) income from federal, state, and municipal securities.

When this omission was brought to his attention at a press conference on June 8, the President said he favored abolition of the foregoing exemptions as well as the corresponding exemptions from state income taxes of federal salaries and of income from federal securities. He observed, however, that action of that sort would require a constitutional amendment, and he could see little hope for ratification of such an amendment by the states. There have nevertheless been signs of a revival of interest in this question in Congress, and the way has been left open for its possible consideration by the new Joint Committee on Tax Evasion and Avoidance. The duties of the committee, to be limited originally to investigation of the methods of tax evasion and avoidance pointed out in the President's message, were broadened in the authorizing resolution as finally adopted so as to include consideration of “other methods of tax evasion and avoidance.”

Moves in Congress to Subject Exempt Income to Tax

On the day the President's message was sent to Congress, Senator Byrd (D., Va.) introduced a bill to permit the states to tax the compensation of federal employees and the income from future issues of federal securities. He introduced also a joint resolution proposing a constitutional amendment which would empower the federal government to tax the compensation of state and municipal employees and the income from state and municipal securities. A score of other resolutions proposing constitutional amendments to permit reciprocal taxation of federal and state securities or the salaries of federal and state employees, or both, had already been introduced at the current session of Congress. While numerous proposals to amend the Constitution in this manner have been advanced in recent sessions, advocacy of such action at the present time is given added force by reason of the current drive to increase the yield of the income tax by closing existing avenues of escape from the full burdens of that levy.