Tax Shelters and Reform

Report Outline
Debate Over Reform Measures
Past National Tax Policies
Current Efforts at Reform
Special Focus

Debate Over Reform Measures

Complaints of Inequity in the Tax Law

As this year's April 17 deadline for filing income tax returns draws near, many taxpayers no doubt would agree with T.S. Eliot that “April is the cruelest month.” Though most Americans have come to accept the assertion that taxes are “what we must pay for civilized society,” complaints about the size of the tax bite are as old as the system itself. From its inception 65 years ago, it was the intent of federal income tax law to promote a fair distribution of the benefits and burdens of taxation. But belief in the equity of the law has been challenged repeatedly by those who contend that built-in advantages, or “loopholes,” allow some persons to avoid paying their fair share of taxes and others to get by without having to pay any tax at all.

A study released by the U.S. Treasury Department in January indicated that individuals with incomes of over $30,000—5 per cent of the total number of U.S. taxpayers—claimed nearly half of the $84 billion in special tax breaks during fiscal year 1977. Persons with annual incomes of over $50,000—1.4 per cent of the taxpayers—took advantage of 31 per cent of the special tax privileges. At the other end of the scale, those earning $10,000 or less — 52 per cent of the taxpaying public — received only 12 per cent of the advantages.

The Treasury Department study said that some of the loopholes benefiting higher income taxpayers were among last year's largest tax writeoffs. For instance, 68 per cent of the benefits from special treatment for capital gains ($6.9 billion) went to individuals with incomes over $50,000; 85 per cent of the benefits from tax-free bond interest ($1.7 billion) went to those in the over $50,000 category. Other major tax breaks going primarily to this group included the depletion allowance for oil, gas and hard minerals, accelerated depreciation on housing investments, and charitable contributions to education.