tax i beyond a doubt, many prosperous and ostensibly intelligentamericans have in recent years done things that to a na?veobserver might appear outlandish, if not actually lunatic. men ofinherited wealth, some of them given to the denunciation ofgovernment in all its forms and manifestations, have shownthemselves to be passionately interested in the financing of stateand municipal governments, and have contributed huge sumsto this end. weddings between persons with very high incomesand persons with not so high incomes have tended to takeplace most often near the end of december and least oftenduring january. some exceptionally successful people, especiallyin the arts, have been abruptly and urgently instructed by theirfinancial advisers to do no more gainful work under anycircumstances for the rest of the current calendar year, andhave followed this advice, even though it sometimes came asearly as may or june. actors and other people with highincomes from personal services have again and again becomethe proprietors of sand-and-gravel businesses, bowling alleys,and telephone-answering services, doubtless adding a certainélan to the conduct of those humdrum establishments.

motion-picture people, as if fulfilling a clockwork schedule ofrenunciation and reconciliation, have repeatedly abjured theirnative soil in favor of foreign countries for periods of eighteenmonths—only to embrace it again in the nineteenth. petroleuminvestors have peppered the earth of texas with speculative oilwells, taking risks far beyond what would be dictated by normalbusiness judgment. businessmen travelling on planes, riding intaxis, or dining in restaurants have again and again been seencompulsively making entries in little notebooks that, if they werequestioned, they would describe as “diaries;” however, far frombeing spiritual descendants of samuel pepys or philip hone,they were writing down only what everything cost. and ownersand part owners of businesses have arranged to share theirownership with minor children, no matter how young; indeed,in at least one case of partnership agreement has been delayedpending the birth of one partner.

as hardly anyone needs to be told, all these odd actions aredirectly traceable to various provisions of the federal income-taxlaw. since they deal with birth, marriage, work, and styles andplaces of living, they give some idea of the scope of the law’ssocial effects, but since they are confined to the affairs of thewell-to-do, they give no idea of the breadth of its economicimpact. inasmuch as almost sixty-three million individual returnswere filed in a typical recent year—1964—it is not surprisingthat the income-tax law is often spoken of as the law of theland that most directly affects the most individuals, andinasmuch as income-tax collections account for almostthree-quarters of our government’s gross receipts, it isunderstandable that it is considered our most important singlefiscal measure. (out of a gross from all sources of a hundredand twelve billion dollars for the fiscal year that ended june30th, 1964, roughly fifty-four and a half billion came fromindividual income taxes and twenty-three and a third billionfrom corporation income taxes.) “in the popular mind, it isthe tax,” the economics professors william j. shultz and c.

lowell harriss declare in their book “american public finance,”

and the writer david t. bazelon has suggested that theeconomic effect of the tax has been so sweeping as to createtwo quite separate kinds of united states currency—before-taxmoney and after-tax money. at any rate, no corporation isever formed, nor are any corporation’s affairs conducted for asmuch as a single day, without the lavishing of earnestconsideration upon the income tax, and hardly anyone in anyincome group can get by without thinking of it occasionally,while some people, of course, have had their fortunes or theirreputations, or both, ruined as a result of their failure tocomply with it. as far afield as venice, an american visitor afew years ago was jolted to find on a brass plaque affixed to acoin box for contributions to the maintenance fund of thebasilica of san marco the words “deductible for u.s.

income-tax purposes.”

a good deal of the attention given to the income tax is basedon the proposition that the tax is neither logical nor equitable.

probably the broadest and most serious charge is that the lawhas close to its heart something very much like a lie; that is, itprovides for taxing incomes at steeply progressive rates, andthen goes on to supply an array of escape hatches soconvenient that hardly anyone, no matter how rich, need paythe top rates or anything like them. for 1960, taxpayers withreportable incomes of between two hundred thousand and fivehundred thousand dollars paid, on the average, about 44 percent, and even those few who reported incomes of over amillion dollars paid well under 50 per cent—which happened tobe just about the percentage that a single taxpayer wassupposed to pay, and often did pay, if his income wasforty-two thousand dollars. another frequently heard charge isthat the income tax is a serpent in the american garden ofeden, offering such tempting opportunities for petty evasion thatit induces a national fall from grace every april. still anotherschool of critics contends that because of its labyrinthine quality(the basic statute, the internal revenue code of 1954, runs tomore than a thousand pages, and the court rulings andinternal revenue service regulations that elaborate it come toseventeen thousand) the income tax not only results in suchidiocies as gravel-producing actors and unborn partners but isin fact that anomaly, a law that a citizen may be unable tocomply with by himself. this situation, the critics declare, leadsto an undemocratic state of affairs, for only the rich can affordthe expensive professional advice necessary to minimize theirtaxes legally.

the income-tax law in toto has virtually no defenders, eventhough most fair-minded students of the subject agree that itseffect over the half century that it has been in force has beento bring about a huge and healthy redistribution of wealth.

when it comes to the income tax, we almost all want reform.

as reformers, however, we are largely powerless, the chiefreasons being the staggering complexity of the whole subject,which causes many people’s minds to go blank at the verymention of it, and the specific, knowledgeable, and energeticadvocacy by small groups of the particular provisions theybenefit from. like any tax law, ours had a kind of immunity toreform; the very riches that people accumulate through the useof tax-avoidance devices can be—and constantly are—applied tofighting the elimination of those devices. such influences,combined with the fierce demands made on the treasury bydefense spending and other rising costs of government (evenleaving aside hot wars like the one in vietnam), have broughtabout two tendencies so marked that they have assumed theshape of a natural political law: in the united states it iscomparatively easy to raise tax rates and to introducetax-avoidance devices, and it is comparatively hard to lower taxrates and to eliminate tax-avoidance devices. or so it seemeduntil 1964, when half of this natural law was spectacularlychallenged by legislation, originally proposed by presidentkennedy and pushed forward by president johnson, thatreduced the basic rates on individuals in two stages from abottom of 20 per cent to a bottom of 14 per cent and from atop of 91 per cent to a top of 70 per cent, and reduced thetop tax on corporations from 52 per cent to 48 per cent—allin all, by far the largest tax cut in our history. meanwhile,however, the other half of the natural law remains immaculate.

to be sure, the proposed tax changes advanced by presidentkennedy included a program of substantial reforms to eliminatetax-avoidance devices, but so great was the outcry against thereforms that kennedy himself soon abandoned most of them,and virtually none of them were enacted; on the contrary, thenew law actually extended or enlarged one or two of thedevices.

“let’s face it, clitus, we live in a tax era. everything’s taxes,”

one lawyer says to another in louis auchincloss’s book ofshort stories called “powers of attorney,” and the secondlawyer, a traditionalist, can enter only a token demurrer.

considering the omnipresence of the income tax in americanlife, however, it is odd how rarely one encounters references toit in american fiction. this omission probably reflects thesubject’s lack of literary elegance, but it may also reflect anational uneasiness about the income tax—a sense that we havewilled into existence, and cannot will out of existence, apresence not wholly good or wholly bad but, rather, soimmense, outrageous, and morally ambiguous that it cannot beencompassed by the imagination. how in the world, one mayask, did it all happen?

an income tax can be truly effective only in an industrialcountry where there are many wage and salary earners, andthe annals of income taxation up to the present century arecomparatively short and simple. the universal taxes of ancienttimes, like the one that brought mary and joseph to bethlehemjust before the birth of jesus, were invariably head taxes, withone fixed sum to be paid by everybody, rather than incometaxes. before about 1800, only two important attempts weremade to establish income taxes—one in florence during thefifteenth century, and the other in france during the eighteenth.

generally speaking, both represented efforts by grasping rulersto mulct their subjects. according to the foremost historian ofthe income tax, the late edwin r. a. seligman, the florentineeffort withered away as a result of corrupt and inefficientadministration. the eighteenth-century french tax, in the wordsof the same authority, “soon became honeycombed withabuses” and degenerated into “a completely unequal andthoroughly arbitrary imposition upon the less well-to-do classes,”

and, as such, it undoubtedly played its part in whipping up themurderous fervor that went into the french revolution. therate of the ancien-régime tax, which was enacted by louisxiv in 1710, was 10 per cent, a figure that was cut in halflater, but not in time; the revolutionary regime eliminated thetax along with its perpetrators. in the face of this cautionaryexample, britain enacted an income tax in 1798 to help financeher participation in the french revolutionary wars, and this was,in several respects, the first modern income tax; for one thing,it had graduated rates, progressing from zero, on annualincomes under sixty pounds, to 10 per cent, on incomes oftwo hundred pounds or more, and, for another, it wascomplicated, containing a hundred and twenty-four sections,which took up a hundred and fifty-two pages. its unpopularitywas general and instantaneous, and a spate of pamphletsdenouncing it soon appeared; one pamphleteer, who purportedto be looking back at ancient barbarities from the year 2000,spoke of the income-tax collectors of old as “mercilessmercenaries” and “brutes … with all the rudeness that insolenceand self-important ignorance could suggest.” after yielding onlyabout six million pounds a year for three years—in large partbecause of widespread evasion—it was repealed in 1802, afterthe treaty of amiens, but the following year, when the britishtreasury again found itself in straitened circumstances,parliament enacted a new income-tax law. this one wasextraordinarily far ahead of its time, in that it included aprovision for the withholding of income at the source, and,perhaps for that reason, it was hated even more than theearlier tax had been, even though its top rate was only half ashigh. at a protest meeting held in the city of london in july,1803, several speakers made what, for britons, must surelyhave been the ultimate commitment of enmity toward theincome tax. if such a measure were necessary to save thecountry, they said, then they would reluctantly have to chooseto let the country go.

yet gradually, despite repeated setbacks, and even extendedperiods of total oblivion, the british income tax began toflourish. this may have been, as much as anything else, amatter of simple habituation, for a common thread runsthrough the history of income taxes everywhere: opposition isalways at its most reckless and strident at the very outset; withevery year that passes, the tax tends to become stronger andthe voices of its enemies more muted. britain’s income tax wasrepealed the year after the victory at waterloo, was revived ina halfhearted way in 1832, was sponsored with enthusiasm bysir robert peel a decade later, and remained in effectthereafter. the basic rate during the second half of thenineteenth century varied between 5 per cent and less than 1per cent, and it was only 2? per cent, with a modest surtaxon high incomes, as late as 1913. the american idea of veryhigh rates on high incomes eventually caught on in britain,though, and by the middle 1960’s the top british bracket wasover 90 per cent.

elsewhere in the world—or at least in the economicallydeveloped world—country after country took the cue frombritain and instituted an income tax at one time or anotherduring the nineteenth century. post-revolutionary france soonenacted an income tax, but then repealed it and managed toget along without one for a number of years in the secondhalf of the century; eventually, though, the loss of revenueproved to be intolerable, and the tax returned, to become afixture of the french economy. an income tax was one of thefirst, if not one of the sweetest, fruits of italian unity, whileseveral of the separate states that were to combine into thegerman nation had income taxes even before they were united.

by 1911, income taxes also existed in austria, spain, belgium,sweden, norway, denmark, switzerland, holland, greece,luxembourg, finland, australia, new zealand, japan, and india.

as for the united states, the enormous size of whoseincome-tax collections and the apparent docility of whosetaxpayers are now the envy of governments everywhere, it wasa laggard in the matter of instituting an income tax and foryears was an inveterate backslider in the matter of keeping oneon its statute books. it is true that in colonial times there werevarious revenue systems bearing some slight resemblance toincome taxes—in rhode island at one point, for example, eachcitizen was supposed to guess the financial status of ten of hisneighbors, in regard to both income and property, in order toprovide a basis for tax assessments—but such schemes, beinginefficient and subject to obvious opportunities for abuse, wereshort-lived. the first man to propose a federal income tax waspresident madison’s secretary of the treasury, alexander j.

dallas; he did so in 1814, but a few months later the war of1812 ended, the demand for government revenue eased, andthe secretary was hooted down so decisively that the subjectwas not revived until the time of the civil war, when both theunion and the confederacy enacted income-tax bills. before1900, very few new income taxes appear to have been enactedanywhere without the stimulus of a war. national income taxeswere—and until quite recently largely remained—war anddefense measures. in june of 1862, prodded by public concernover a public debt that was increasing at the rate of twomillion dollars a day, congress reluctantly passed a lawproviding for an income tax at progressive rates up to amaximum of 10 per cent, and on july 1st president lincolnsigned it into law, along with a bill to punish the practice ofpolygamy. (the next day, stocks on the new york exchangetook a dive, which was probably not attributable to thepolygamy bill.)“i am taxed on my income! this is perfectly gorgeous! inever felt so important in my life before,” mark twain wrote inthe virginia city, nevada, territorial enterprise after he hadpaid his first income-tax bill, for the year 1864—$36.82,including a penalty of $3.12 for being late. although few othertaxpayers were so enthusiastic, the law remained in force until1872. it was, however, subjected to a succession of ratereductions and amendments, one of them being the elimination,in 1865, of its progressive rates, on the arresting ground thatcollecting 10 per cent on high incomes and lower rates onlower incomes constituted undue discrimination against wealth.

annual revenue collections mounted from two million dollars in1863 to seventy-three million in 1866, and then descendedsharply. for two decades, beginning in the earlyeighteen-seventies, the very thought of an income tax did notenter the american mind, apart from rare occasions whensome populist or socialist agitator would propose theestablishment of such a tax designed specifically to soak theurban rich. then, in 1893, when it had become clear that thecountry was relying on an obsolete revenue system that puttoo little burden on businessmen and members of theprofessions, president cleveland proposed an income tax. theoutcry that followed was shrill. senator john sherman, of ohio,the father of the sherman antitrust act, called the proposal“socialism, communism, and devilism,” and another senatorspoke darkly of “the professors with their books, the socialistswith their schemes … [and] the anarchists with their bombs,”

while over in the house a congressman from pennsylvania laidhis cards on the table in the following terms:

an income tax! a tax so odious that no administration ever dared toimpose it except in time of war.… it is unutterably distasteful both in itsmoral and material aspects. it does not belong to a free country. it is classlegislation.… do you desire to offer a reward to dishonesty and toencourage perjury? the imposition of the tax will corrupt the people. it willbring in its train the spy and the informer. it will necessitate a swarm ofofficials with inquisitorial powers.… mr. chairman, pass this bill and thedemocratic party signs its death warrant.

the proposal that gave rise to these fulminations was for a taxat a uniform rate of 2 per cent on income in excess of fourthousand dollars, and it was enacted into law in 1894. thedemocratic party survived, but the new law did not. before itcould be put into force, it was thrown out by the supremecourt, on the ground that it violated the constitutional provisionforbidding “direct” taxes unless they were apportioned amongthe states according to population (curiously, this point had notbeen raised in connection with the civil war income tax), andthe income-tax issue was dead again, this time for a decadeand a half. in 1909, by what a tax authority named jeromehellerstein has called “one of the most ironic twists of politicalevents in american history,” the constitutional amendment (thesixteenth) that eventually gave congress the power to levy taxeswithout apportionment among the states was put forward bythe implacable opponents of the income tax, the republicans,who took the step as a political move, confidently believing thatthe amendment would never be ratified by the states. to theirdismay, it was ratified in 1913, and later that year congressenacted a graduated tax on individuals at rates ranging from 1per cent to 7 per cent, and also a flat tax of 1 per cent onthe net profits of corporations. the income tax has been withus ever since.

by and large, its history since 1913 has been one of risingrates and of the seasonable appearance of special provisions tosave people in the upper brackets from the inconvenience ofhaving to pay those rates. the first sharp rise took placeduring the first world war, and by 1918 the bottom rate was6 per cent and the top one, applicable to taxable income inexcess of a million dollars, was 77 per cent, or far more thanany government had previously ventured to exact on income ofany amount. but the end of the war and the “return tonormalcy” brought a reversal of the trend, and there followedan era of low taxes for rich and poor alike. rates werereduced by degrees until 1925, when the standard rate scaleran from 1? per cent to an absolute top of 25 per cent, and,furthermore, a great majority of the country’s wage earnerswere relieved of paying any tax at all by being allowed personalexemptions of fifteen hundred dollars for a single person,thirty-five hundred dollars for a married couple, and fourhundred dollars for each dependent. this was not the wholestory, for it was during the twenties that special-interestprovisions began to appear, stimulated into being by thecomplex of political forces that has accounted for their increaseat intervals ever since. the first important one, adopted in1922, established the principle of favored treatment for capitalgains; this meant that money acquired through a rise in thevalue of investments was, for the first time, taxed at a lowerrate than money earned in wages or for services—as, ofcourse, it still is today. then, in 1926, came the loophole thathas undoubtedly caused more gnashing of teeth among thosenot in a position to profit by it than any other—the percentagedepletion allowance on petroleum, which permits the owner of aproducing oil well to deduct from his taxable income up to27? per cent of his gross annual income from the well and tokeep deducting that much year after year, even though he hasdeducted the original cost of the well many times over.

whether or not the twenties were a golden age for theamerican people in general, they were assuredly a golden agefor the american taxpayer.

the depression and the new deal brought with them a trendtoward higher tax rates and lower exemptions, which led up toa truly revolutionary era in federal income taxation—that of thesecond world war. by 1936, largely because of greatlyincreased public spending, rates in the higher brackets wereroughly double what they had been in the late twenties, andthe very top bracket was 79 per cent, while, at the low end ofthe scale, personal exemptions had been reduced to the pointwhere a single person was required to pay a small tax even ifhis income was only twelve hundred dollars. (as a matter offact, at that time most industrial workers’ incomes did notexceed twelve hundred dollars.) in 1944 and 1945, the ratescale for individuals reached its historic peak—23 per cent atthe low end and 94 per cent at the high one—while incometaxes on corporations, which had been creeping up graduallyfrom the original 1913 rate of 1 per cent, reached the pointwhere some companies were liable for 80 per cent. but therevolutionary thing about wartime taxation was not the veryhigh rates on high incomes; indeed, in 1942, when this upwardsurge was approaching full flood, a new means of escape forhigh-bracket taxpayers appeared, or an old one widened, forthe period during which stocks or other assets must be held inorder to benefit from the capital-gains provision was reducedfrom eighteen months to six. what was revolutionary was therise of industrial wages and the extension of substantial taxrates to the wage earner, making him, for the first time, animportant contributor to government revenue. abruptly, theincome tax became a mass tax.

and so it has remained. although taxes on big andmiddle-sized businesses settled down to a flat rate of 52 percent, rates on individual income did not change significantlybetween 1945 and 1964. (that is to say, the basic rates didnot change significantly; there were temporary remissions,amounting to anywhere from 5 per cent to 17 per cent of thesums due under the basic rates, during the years 1946 through1950.) the range was from 20 per cent to 91 per cent until1950; there was a small rise during the korean war, but itwent right back there in 1954. in 1950, another importantescape route, the so-called “restricted stock option,” opened up,enabling some corporate executives to be taxed on part of theircompensation at low capital-gains rates. the significant change,invisible in the rate schedule, has been a continuation of theone begun in wartime; namely, the increase in theproportionate tax burden carried by the middle and lowerincome groups. paradoxical as it may seem, the evolution ofour income tax has been from a low-rate tax relying forrevenue on the high income group to a high-rate tax relyingon the middle and lower-middle income groups. the civil warlevy, which affected only one per cent of the population, wasunmistakably a rich man’s tax, and the same was true of the1913 levy. even in 1918, at the height of the budget squeezeproduced by the first world war, less than four and a halfmillion americans, of a total population of more than ahundred million, had to file income-tax returns at all. in 1933,in the depths of the depression, only three and three-quartersmillion returns were filed, and in 1939 an élite consisting ofseven hundred thousand taxpayers, of a population of ahundred and thirty million, accounted for nine-tenths of allincome-tax collections, while in 1960 it took some thirty-twomillion taxpayers—something over one-sixth of the population—toaccount for nine-tenths of all collections, and a whopping bignine-tenths it was, totalling some thirty-five and a half billiondollars, compared to less than a billion in 1939.

the historian seligman wrote in 1911 that the history ofincome taxation the world over consisted essentially of “evolutiontoward basing it on ability to pay.” one wonders whatqualifications he might add, on the basis of the americanexperience since then, if he were still alive. of course, onereason people with middle incomes pay far more in taxes thanthey used to is that there are far more of them. changes inthe country’s social and economic structure have been as big afactor in the shift as the structure of the income tax has. itremains probable, though, that, in actual practice, the aboriginalincome tax of 1913 extracted money from citizens with stricterregard to their ability to pay than the present income tax does.

whatever the faults of our income-tax law, it is beyondquestion the best-obeyed income-tax law in the world, andincome taxes are now ubiquitous, from the orient to theoccident and from pole to pole. (practically all of the dozens ofnew nations that have come into being over the past few yearshave adopted income-tax measures. walter h. diamond, theeditor of a publication called foreign tax & trade briefs, hasnoted that as recently as 1955 he could rattle off the names oftwo dozen countries, large and small, that did not tax theindividual, but that in 1965 the only names he could rattle offwere those of a couple of british colonies, bermuda and thebahamas; a couple of tiny republics, san marino and andorra;three oil-rich middle eastern countries, the sultanate of muscatand oman, kuwait, and qatar; and two rather inhospitablecountries, monaco and saudi arabia, which taxed the incomesof resident foreigners but not those of nationals. evencommunist countries have income taxes, though they count onthem for only a small percentage of their total revenue; russiaapplies different rates to different occupations, shopkeepers andecclesiastics being in the high tax bracket, artists and writersnear the middle, and laborers and artisans at the bottom.)evidence of the superior efficiency of tax collecting in theunited states is plentiful; for instance, our costs foradministration and enforcement come to only about forty-fourcents for every hundred dollars collected, as against a ratemore than twice as high in canada, more than three times ashigh in england, france, and belgium, and many times as highin other places. this kind of american efficiency is the despairof foreign tax collectors. toward the end of his term in officemortimer m. caplin, who was commissioner of internalrevenue from january, 1961, until july, 1964, held consultationswith the leading tax administrators of six western europeancountries, and the question heard again and again was “howdo you do it? do they like to pay taxes over there?” ofcourse, they do not, but, as caplin said at the time, “we havea lot going for us that the europeans haven’t.” one thing wehave going for us is tradition. american income taxes originatedand developed not as a result of the efforts of monarchs to filltheir coffers at the expense of their subjects but as a result ofthe efforts of an elected government to serve the generalinterest. a widely travelled tax lawyer observed not long ago,“in most countries, it’s impossible to engage in a seriousdiscussion of income taxes, because they aren’t taken seriously.”

they are taken seriously here, and part of the reason is thepower and skill of our income-tax police force, the internalrevenue service.

unquestionably, the “swarm of officials” feared by thepennsylvania congressman in 1894 has come into being—andthere are those who would add that the officials have the“inquisitorial powers” he also feared. as of the beginning of1965, the internal revenue service had approximately sixtythousand employees, including more than six thousand revenueofficers and more than twelve thousand revenue agents, andthese eighteen thousand men, possessing the right to inquireinto every penny of everyone’s income and into matters likeexactly what was discussed at an expense-account meal, andarmed with the threat of heavy punishments, have powers thatmight reasonably be called inquisitorial. but the i.r.s. engagesin many activities besides actual tax collecting, and some ofthese suggest that it exercises its despotic powers in anequitable way, if not actually in a benevolent one. notableamong the additional activities is a taxpayer-education programon a scale that occasionally inspires an official to boast that thei.r.s. runs the largest university in the world. as part of thisprogram, it puts out dozens of publications explicating variousaspects of the law, and it is proud of the fact that the mostgeneral of these—a blue-covered pamphlet entitled “your federalincome tax,” which is issued annually and in 1965 could bebought for forty cents at any district director’s office—is sopopular that it is often reprinted by private publishers, who sellit to the unwary for a dollar or more, pointing out, withtriumphant accuracy, that it is an official government publication.

(since government publications are not copyrighted, this isperfectly legal.) the i.r.s. also conducts “institutes” on technicalquestions every december for the enlightenment of the vastcorps of “tax practitioners”—accountants and lawyers—who willshortly be preparing the returns of individuals and corporations.

it puts out elementary tax manuals designed specially for freedistribution to any high schools that ask for them—and,according to one i.r.s. official, some eighty-five per cent ofamerican high schools did ask for them in one recent year.

(the question of whether schoolchildren ought to be spendingtheir time boning up on the tax laws is one that the i.r.s.

considers to be outside its scope.) furthermore, just before thetax deadline each year, the i.r.s. customarily goes on televisionwith spot advertisements offering tax pointers and reminders. itis proud to say that, of the various spots, a clear majority havebeen in the interests of protecting taxpayers from overpaying.

in the fall of 1963, the i.r.s. took a big step towardincreasing the efficiency of its collections still further, and, by afeat worthy of the wolf in “little red riding hood,” it managedto present the step to the public as a grandmotherly move tohelp everybody out. the step was the establishment of aso-called national-identity file, involving the assignment to everytaxpayer of an account number (usually his social securitynumber), and its intention was to practically eliminate theproblem created by people who fail to declare their incomefrom corporate dividends or from interest on bank accounts orbonds—a form of evasion that was thought to have beencosting the treasury hundreds of millions a year. but that isnot all. when the number is entered in the proper place on areturn, “this will make certain that you are given immediatecredit for taxes reported and paid by you, and that any refundwill be promptly recorded in your favor”—so commissionercaplin commented brightly on the front cover of the 1964tax-return forms. the i.r.s. then began taking another giantstep—the adoption of a system for automating a large part ofthe tax-checking process, in which seven regional computerswould collect and collate data that would be fed into a masterdata-processing center at martinsburg, west virginia. thisinstallation, designed to make a quarter of a million numbercomparisons per second, began to be called the martinsburgmonster even before it was in full operation. in 1965, betweenfour and five million returns a year were given a completeaudit, and all returns were checked for mathematical errors.

some of this mathematical work was being done by computersand some by people, but by 1967, when the computer systemwas going full blast, all the mathematical work was done bymachine, thus freeing many i.r.s. employees to subject evenmore returns to detailed audits. according to a publicationauthorized by the i.r.s. back in 1963, though, “the capacityand memory of the [computer] system will help taxpayers whoforget prior year credits or who do not take full advantage oftheir rights under the laws.” in short, it was going to be afriendly monster.

if the mask that the i.r.s. had presented to the country inrecent years has worn a rather ghastly expression of benignity,part of the explanation is probably nothing more sinister thanthe fact that caplin, the man who dominated it in those years,is a cheerful extrovert and a natural politician, and that hisinfluence continued to be felt under the man who wasappointed to succeed him as commissioner in december1964—a young washington lawyer named sheldon s. cohen,who took over the job after a six-month interim during whichan i.r.s. career man named bertrand m. harding served asacting commissioner. (when caplin resigned as commissioner,he stepped out of politics, at least temporarily, returning to hiswashington law practice as a specialist in, among other things,the tax problems of businessmen.) caplin is widely consideredto have been one of the best commissioners of internalrevenue in history, and, at the very least, he was certainly animprovement on two fairly recent occupants of the post, one ofwhom, some time after leaving it, was convicted and sentencedto two years in prison for evading his own income taxes, andthe other of whom subsequently ran for public office on aplatform of opposition to any federal income tax—as a formerumpire might stump the country against baseball. among theaccomplishments that mortimer caplin, a small, quick-spoken,dynamic man who grew up in new york city and used to bea university of virginia law professor, is credited with ascommissioner is the abolition of the practice that had previouslybeen alleged to exist of assigning collection quotas to i.r.s.

agents. he gave the top echelons of i.r.s. an air of integritybeyond cavil, and, what was perhaps most striking, managedthe strange feat of projecting to the nation a sort ofenthusiasm for taxes, considered abstractly. thus he managedto collect them with a certain style—a sort of subsidiary newfrontier, which he called the new direction. the chief thrust ofthe new direction was to put increased emphasis on educationleading toward increased voluntary compliance with the tax law,instead of concentrating on the search for and prosecution ofconscious offenders. in a manifesto that caplin issued to hisswarm of officials in the spring of 1961, he wrote, “we allshould understand that the service is not simply running adirect enforcement business aimed at making $2 billion inadditional assessments, collecting another billion from delinquentaccounts, and prosecuting a few hundred evaders. rather, it ischarged with administering an enormous self-assessment taxsystem which raises over $90 billion from what peoplethemselves put down on their tax returns and voluntarily pay,with another $2 or $3 billion coming from direct enforcementactivities. in short, we cannot forget that 97 per cent of ourtotal revenue comes from self-assessment or voluntarycompliance, with only three per cent coming directly fromenforcement. our chief mission is to encourage and achievemore effective voluntary compliance.… the new direction isreally a shift in emphasis. but it is a very important shift.”

it may be, though, that the true spirit of the new direction isbetter epitomized on the jacket of a book entitled “theamerican way in taxation,” edited by lillian doris, which waspublished in 1963 with the blessing of caplin, who wrote theforeword. “here is the exciting story of the largest and mostefficient tax collecting organization the world has everknown—the united states internal revenue service!” the jacketannounced, in part. “here are the stirring events, thebitterly-fought legislative battles, the dedicated civil servants thathave marched through the past century and left an indelibleimprint on our nation. you’ll thrill to the epic legal battle to killthe income tax … and you’ll be astonished at the future plansof the i.r.s. you’ll see how giant computers, now on thedrawing boards, are going to affect the tax collection systemand influence the lives of many american men and women innew and unusual ways!” it sounded a bit like a circus barkerhawking a public execution.

it is debatable whether the new direction watchword of“voluntary compliance” could properly be used to describe asystem of tax collection under which some three-quarters of allcollections from individuals are obtained through withholding atthe source, under which the i.r.s. and its martinsburg monsterlurk to catch the unwary evader, and under which thepunishment for evasion runs up to five years in prison peroffense in addition to extremely heavy financial penalties. caplin,however, did not seem to feel a bit of concern over this point.

with tireless good humor, he made the rounds of the nation’sorganizations of businessmen, accountants, and lawyers, givingluncheon talks in which he praised them for their voluntarycompliance in the past, exhorted them to greater efforts in thefuture, and assured them that it was all in a good cause.

“we’re still striving for the human touch in our taxadministration,” declared the essay on the cover of the 1964tax-return forms, which caplin signed, and which he says hecomposed in collaboration with his wife. “i see a lot of humorin this job,” he told a caller a few hours after remarking to aluncheon meeting of the kiwanis club of washington at themayflower hotel, “last year was the fiftieth anniversary of theincome-tax amendment to the constitution, but the internalrevenue service somehow or other didn’t seem to get anybirthday cakes.” this might perhaps be considered a form ofgallows humor, except that the hangman is not supposed to bethe one who makes the jokes.

cohen, the commissioner who succeeded caplin and was stillin office in mid-1968, is a born-and-bred washingtonian who, in1952, graduated from george washington university law schoolat the top of his class; served in a junior capacity with thei.r.s. for the next four years; practiced law in washington forseven years after that, eventually becoming a partner in thecelebrated firm of arnold, fortas & porter; at the beginning of1964 returned to the i.r.s., as its chief counsel; and a yearlater, at the age of thirty-seven, became the youngestcommissioner of internal revenue in history. a man withclose-cropped brown hair, candid eyes, and a guileless mannerthat makes him seem even younger than he is, cohen camefrom the chief counsel’s office with the reputation of havinguplifted it both practically and philosophically; he wasresponsible for an administrative reorganization that has beenwidely praised as making faster decisions possible, and for ademand that the i.r.s. be consistent in its legal stand in casesagainst taxpayers (that it refrain from taking one position on afine point of code interpretation in philadelphia, say, and theopposite position on the same point in omaha), which isconsidered a triumph of high principle over governmental greed.

in general, cohen said upon assuming office, he intended tocontinue caplin’s policies—to emphasize “voluntary compliance,”

to strive for agreeable, or at least not disagreeable, relationswith the taxpaying public, and so on. he is a less gregariousand a more reflective man than caplin, however, and thisdifference has had its effect on the i.r.s. as a whole. he hasstuck relatively close to his desk, leaving the luncheon-circuitpep talks to subordinates. “mort was wonderful at that sort ofthing,” cohen said in 1965. “public opinion of the service ishigh now as a result of his big push in that direction. wewant to keep it high without more pushing on my part.

anyhow, i couldn’t do it well—i’m not made that way.”

a charge that has often been made, and continues to bemade, is that the office of commissioner carries with it far toomuch power. the commissioner has no authority to proposechanges in rates or initiate other new tax legislation—theauthority to propose rate changes belongs to the secretary ofthe treasury, who may or may not seek the commissioner’sadvice in the matter, and the enactment of new tax laws is, ofcourse, the job of congress and the president—but tax laws,since they must cover so many different situations, arenecessarily written in rather general terms, and thecommissioner is solely responsible (subject to reversal in thecourts) for writing the regulations that are supposed to explainthe laws in detail. and sometimes the regulations are a bitcloudy themselves, and in such cases who is better qualified toexplain them than their author, the commissioner? thus itcomes about that almost every word that drops from thecommissioner’s mouth, whether at his desk or at luncheonmeetings, is immediately distributed by the various tax publishingservices to tax accountants and lawyers all over the countryand is gobbled up by them with an avidity not always accordedthe remarks of an appointed official. because of this, somepeople see the commissioner as a virtual tyrant. others,including both theoretical and practical tax experts, disagree.

jerome hellerstein, who is a law professor at new yorkuniversity law school as well as a tax adviser, says, “thelatitude of action given the commissioner is great, and it’s truethat he can do things that may affect the economicdevelopment of the country as well as the fortunes ofindividuals and corporations. but if he had small freedom ofaction, it would result in rigidity and certainty of interpretation,and would make it much easier for tax practitioners like me tomanipulate the law to their clients’ advantage. thecommissioner’s latitude gives him a healthy unpredictability.”

certainly caplin did not knowingly abuse his power, nor hascohen done so. upon visiting first one man and then theother in the commissioner’s office, i found that both conveyedthe impression of being men of high intelligence who wereliving—as arthur m. schlesinger, jr., has said that thoreaulived—at a high degree of moral tension. and the cause of themoral tension is not hard to find; it almost surely stemmedfrom the difficulty of presiding over compliance, voluntary orinvoluntary, with a law of which one does not very heartilyapprove. in 1958, when caplin appeared—as a witness versedin tax matters, rather than as commissioner of internalrevenue—before the house ways and means committee, heproposed an across-the-board program of reforms, including,among other things, either the total elimination or a drasticcurbing of favored treatment for capital gains; the lowering ofpercentage depletion rates on petroleum and other minerals; thewithholding of taxes on dividends and interest; and the eventualdrafting of an entirely new income-tax law to replace the 1954code, which he declared had led to “hardships, complexities,and opportunities for tax avoidance.” shortly after caplin leftoffice, he explained in detail what his ideal tax law would belike. compared to the present tax law, it would be heroicallysimple, with loopholes eliminated, and most personal deductionsand exemptions eliminated, too, and with a rate scale rangingfrom 10 to 50 per cent.

in caplin’s case, the resolution of moral tension, insofar as heachieved it, was not entirely the result of rational analysis.

“some critics take a completely cynical view of the income tax,”

he mused one day during his stint as commissioner. “theysay, in effect, ‘it’s a mess, and nothing can be done about it.’

i can’t go along with that. true, many compromises arenecessary, and will continue to be. but i refuse to accept adefeatist attitude. there’s a mystic quality about our tax system.

no matter how bad it may be from the technical standpoint, ithas a vitality because of the very high level of compliance.” hepaused for quite a long time, perhaps finding a flaw in his ownargument; in the past, after all, universal compliance with a lawhas not always been a sign that it was either intelligent or just.

then he went on, “looking over the sweep of years, i thinkwe’ll come out well. probably a point of crisis of some kind willmake us begin to see beyond selfish interests. i’m optimisticthat fifty years from now we’ll have a pretty good tax.”

as for cohen, he was working in the legislation-draftingsection of the i.r.s. at the time the present code was written,and he had a hand in its composition. one might suppose thatthis fact would cause him to have a certain proprietary feelingtoward it, but apparently that is not so. “remember that wehad a republican administration then, and i’m a democrat,” hesaid one day in 1965. “when you are drafting a statute, youoperate as a technician. any pride you may feel afterward ispride in technical competence.” so cohen can reread his oldprose, now enshrined as law, with neither elation nor remorse,and he has not the slightest hesitation about endorsing caplin’sopinion that the code leads to “hardships, complexities, andopportunities for tax avoidance.” he is more pessimistic thancaplin about finding the answer in simplification. “perhaps wecan move the rates down and get rid of some deductions,” hesays, “but then we may find we need new deductions, in theinterests of fairness. i suspect that a complex society requires acomplex tax law. if we put in a simpler code, it would probablybe complex again in a few years.”

ii“every nation has the government it deserves,” the frenchwriter and diplomat joseph de maistre declared in 1811. sincethe primary function of government is to make laws, thestatement implies that every nation has the laws it deserves,and if the doctrine may be considered at best a half truth inthe case of governments that exist by force, it does seempersuasive in the case of governments that exist by popularconsent. if the single most important law now on the statutebooks of the united states is the income-tax law, it wouldfollow that we must have the income-tax law we deserve. muchof the voluminous discussion of the income-tax law in recentyears has centered on plain violations of it, among them thedeliberate padding of tax-deductible business-expense accounts,the matter of taxable income that is left undeclared on taxreturns, fraudulently or otherwise—a sum estimated at as highas twenty-five billion dollars a year—and the matter ofcorruption within the ranks of the internal revenue service,which some authorities believe to be fairly common, at least inlarge cities. such forms of outlawry, of course, reflect timelessand worldwide human frailties. the law itself, however, hascertain characteristics that are more closely related to aparticular time and place, and if de maistre was right, theseshould reflect national characteristics; the income-tax law, that is,should be to some extent a national mirror. how does thereflection look?

to repeat, then, the basic law under which income taxes arenow imposed is the internal revenue code of 1954, asamplified by innumerable regulations issued by the internalrevenue service, interpreted by innumerable judicial decisions,and amended by several acts of congress, including therevenue act of 1964, which embodied the biggest tax cut inour history. the code, a document longer than “war andpeace,” is phrased—inevitably, perhaps—in the sort of jargonthat stuns the mind and disheartens the spirit; a fairly typicalsentence, dealing with the definition of the word “employment,”

starts near the bottom of page 564, includes more than athousand words, nineteen semicolons, forty-two simpleparentheses, three parentheses within parentheses, and evenone unaccountable interstitial period, and comes to a gaspingend, with a definitive period, near the top of page 567. notuntil one has penetrated to the part of the code dealing withexport-import taxes (which fall within its province, along withestate taxes and various other federal imposts) does one comeupon a comprehensible and diverting sentence like “everyperson who shall export oleomargarine shall brand upon everytub, firkin, or other package containing such article the word‘oleomargarine,’ in plain roman letters not less than one-halfinch square.” yet a clause on page 2 of the code, though it isnot a sentence at all, is as clear and forthright as one couldwish; it sets forth without ado the rates at which the incomesof single individuals are to be taxed: 20 per cent on taxableincome of not over $2,000; 22 per cent on taxable income ofover $2,000 but not over $4,000; and so on up to a top rateof 91 per cent on taxable income of over $200,000. (as wehave seen, the rates were amended downward in 1964 to atop of 70 per cent.) right at the start, then, the code makesits declaration of principle, and, to judge by the rate table, it isimplacably egalitarian, taxing the poor relatively lightly, thewell-to-do moderately, and the very rich at levels that verge onthe confiscatory.

but, to repeat a point that has become so well known that itscarcely needs repeating, the code does not live up to itsprinciples very well. for proof of this, one need look no furtherthan some of the recent score sheets of the income tax—a setof volumes entitled statistics of income, which are publishedannually by the internal revenue service. for 1960, individualswith gross incomes of between $4,000 and $5,000, after takingadvantage of all their deductions and personal exemptions, andavailing themselves of the provision that allows married couplesand the heads of households to be taxed at rates generallylower than those for single persons, ended up paying anaverage tax bill of about one-tenth of their reportable receipts,while those in the $10,000–$15,000 range paid a bill of aboutone-seventh, those in the $25,000–$50,000 range paid a bill ofnot quite a quarter, and those in the $50,000–$100,000 rangepaid a bill of about a third. up to this point, clearly, we find aprogression according to ability to pay, much as the rate tableprescribes. however, the progression stops abruptly when wereach the top income brackets—that is, at just the point whereit is supposed to become most marked. for 1960, the$150,000–$200,000, $200,000–$500,000, $500,000$1,000,000 and million-plus groups each paid, on the average,less than 50 per cent of their reportable incomes, and whenone takes into consideration the fact that the richer a man is,the likelier it is that a huge proportion of his money need noteven be reported as gross taxable income—all income fromcertain bonds, for example, and half of all income fromlong-term capital gains—it becomes evident that at the very topof the income scale the percentage rate of actual taxation turnsdownward. the evidence is confirmed by the statistics ofincome for 1961, which breaks down figures on paymentsaccording to bracket, and which shows that although 7,487taxpayers declared gross incomes of $200,000 or more, fewerthan five hundred of them had net income that was taxed atthe rate of 91 per cent. throughout its life, the rate of 91 percent was a public tranquilizer, making everyone in the lowerbracket feel fortunate not to be rich, and not hurting the richvery much. and then, to top off the joke, if that is what it is,there are the people with more income than anyone else whopay less tax than anyone else—that is, those with annualincomes of a million dollars or more who manage to findperfectly legal ways of paying no income tax at all. accordingto statistics of income, there were eleven of them in 1960,out of a national total of three hundred and six million-a-yearmen, and seventeen in 1961, out of a total of three hundredand ninety-eight. in plain fact, the income tax is hardlyprogressive at all.

the explanation of this disparity between appearance andreality, so huge that it lays the code open to a broadaccusation of hypocrisy, is to be found in the detailedexceptions to the standard rates which lurk in its dimdepths—exceptions that are usually called special-interestprovisions or, more bluntly, loopholes. (“loophole,” as allfair-minded users of the word are ready to admit, is asomewhat subjective designation, for one man’s loophole maybe another man’s lifeline—or perhaps at some other time, thesame man’s lifeline.) loopholes were noticeably absent from theoriginal 1913 income-tax law. how they came to be law andwhy they remain law are questions involving politics andpossibly metaphysics, but their actual workings are relativelysimple, and are illuminating to watch. by far the simplestmethod of avoiding income taxes—at least for someone whohas a large amount of capital at his disposal—is to invest in thebonds of states, municipalities, port authorities, and toll roads;the interest paid on all such bonds is unequivocally tax-exempt.

since the interest on high-grade tax-exempt bonds in recentyears has run from three to five per cent, a man who investsten million dollars in them can collect $300,000 to $500,000 ayear tax-free without putting himself or his tax lawyer to theslightest trouble; if he had been foolish enough to sink themoney in ordinary investments yielding, say, five per cent, hewould have had a taxable income of $500,000, and at the1964 rate, assuming that he was single, had no other income,and did not avail himself of any dodges, he would have to paytaxes of almost $367,000. the exemption on state andmunicipal bonds has been part of our income-tax law since itsbeginnings; it was based originally on constitutional groundsand is now defended on the ground that the states and townsneed the money. most secretaries of the treasury have lookedon the exemption with disfavor, but not one has been able toaccomplish its repeal.

probably the most important special-interest provision in thecode is the one that concerns capital gains. the staff of thejoint economic committee of congress wrote in a report issuedin 1961, “capital gains treatment has become one of the mostimpressive loopholes in the federal revenue structure.” what theprovision says, in essence, is that a taxpayer who makes acapital investment (in real estate, a corporation, a block ofstock, or whatever), holds on to it for at least six months, andthen sells it at a profit is entitled to be taxed on the profit ata rate much lower than the rate on ordinary income; to bespecific, the rate is half of that taxpayer’s ordinary top tax rateor twenty-five per cent whichever is less. what this means toanyone whose income would normally put him in a very hightax bracket is obvious: he must find a way of getting as muchas possible of that income in the form of capital gains.

consequently, the game of finding ways of converting ordinaryincome into capital gains has become very popular in the pastdecade or two. the game is often won without much of astruggle. on television one evening in the middle 1960s, davidsusskind asked six assembled multimillionaires whether any ofthem considered tax rates a stumbling block on the highroad towealth in america. there was a long silence, almost as if thenotion were new to the multimillionaires, and then one of them,in the tone of some one explaining something to a child,mentioned the capital-gains provision and said that he didn’tconsider taxes much of a problem. there was no morediscussion of high tax rates that night.

if the capital-gains provision resembles the exemption oncertain bonds in that the advantages it affords are of benefitchiefly to the rich, it differs in other ways. it is by far themore accommodating of the two loopholes; indeed, it is a sortof mother loophole capable of spawning other loopholes. forexample, one might think that a taxpayer would need to havecapital before he could have a capital gain. yet a way wasdiscovered—and was passed into law in 1950—for him to getthe gain before he has the capital. this is the stock-optionprovision. under its terms, a corporation may give its executivesthe right to buy its shares at any time within a stipulatedperiod—say, five years—at or near the open-market price at thetime of the granting of the option; later on, if, as hashappened so often, the market price of the stock goessky-high, the executives may exercise their options to buy thestock at the old price, may sell it on the open market sometime later at the new price, and may pay only capital-gainsrates on the difference, provided that they go through thesemotions without unseemly haste. the beauty of it all from anexecutive’s point of view is that once the stock has gone upsubstantially in value, his option itself becomes a valuablecommodity, against which he can borrow the cash he needs inorder to exercise it; then, having bought the stock and sold itagain, he can pay off his debt and have a capital gain that hasarisen from the investment of no capital. the beauty of it allfrom the corporations’ point of view is that they cancompensate their executives partly in money taxable at relativelylow rates. of course, the whole scheme comes to nothing if thecompany’s stock goes down, which does happen occasionally, orif it simply doesn’t go up, but even then the executive has hada free play on the roulette wheel of the stock market, with achance of winning a great deal and practically no danger oflosing anything—something that the tax law offers no othergroup.

by favoring capital gains over ordinary income, the codeseems to be putting forward two very dubious notions—thatone form of unearned income is more deserving than anyform of earned income, and that people with money to investare more deserving than people without it. hardly anyonecontends that the favored treatment of capital gains can bejustified on the ground of fairness; those who consider thisaspect of the matter are apt to agree with hellerstein, who haswritten, “from a sociological viewpoint, there is a good deal tobe said for more severe taxation of profit from appreciation inthe value of property than from personal-service income.” thedefense, then, is based on other grounds. for one, there is arespectable economic theory that supports a complete exemptionof capital gains from income tax, the argument being thatwhereas wages and dividends or interest from investments arefruits of the capital tree, and are therefore taxable income,capital gains represent the growth of the tree itself, and aretherefore not income at all. this distinction is actually embeddedin the tax laws of some countries—most notably in the tax lawof britain, which in principle did not tax capital gains until 1964.

another argument—this one purely pragmatic—has it that thecapital-gains provision is necessary to encourage people to takerisks with their capital. (similarly, the advocates of stock optionssay that corporations need them to attract and hold executivetalent.) finally, nearly all tax authorities are agreed that taxingcapital gains on exactly the same basis as other income, whichis what most reformers say ought to be done, would involveformidable technical difficulties.

particular subcategories of the rich and the well-paid can availthemselves of various other avenues of escape, includingcorporate pension plans, which, like stock options, contribute tothe solution of the tax problems of executives; tax-freefoundations set up ostensibly for charitable and educationalpurposes, of which over fifteen thousand help to ease the taxburdens of their benefactors, though the charitable andeducational activities of some of them are more or less invisible;and personal holding companies, which, subject to rather strictregulations, enable persons with very high incomes frompersonal services like writing and acting to reduce their taxesby what amounts to incorporating themselves. of the wholearray of loopholes in the code, however, probably the mostwidely loathed is the percentage depletion allowance on oil. asthe word “depletion” is used in the code, it refers to theprogressive exhaustion of irreplaceable natural resources, but asused on oilmen’s tax returns, it proves to mean a miraculouslyglorified form of what is ordinarily called depreciation. whereasa manufacturer may claim depreciation on a piece of machineryas a tax deduction only until he has deducted the original costof the machine—until, that is, the machine is theoreticallyworthless from wear—an individual or corporate oil investor, forreasons that defy logical explanation, may go on claimingpercentage depletion on a producing well indefinitely, even ifthis means that the original cost of the well has been recoveredmany times over. the oil-depletion allowance is 27.5 per cent ayear up to a maximum of half of the oil investor’s net income(there are smaller allowances on other natural resources, suchas 23 per cent on uranium, 10 per cent on coal, and 5 percent on oyster and clam shells), and the effect it has on thetaxable income of an oil investor, especially when it is combinedwith the effects of other tax-avoidance devices, is trulyastonishing; for instance, over a recent five-year period oneoilman had a net income of fourteen and a third milliondollars, on which he paid taxes of $80,000, or six-tenths ofone per cent. unsurprisingly, the percentage-depletion allowanceis always under attack, but, also unsurprisingly, it is defendedwith tigerish zeal—so tigerish that even president kennedy’s1961 and 1963 proposals for tax revision, which, taken together,are generally considered the broadest program of tax reformever put forward by a chief executive, did not venture tosuggest its repeal. the usual argument is that thepercentage-depletion allowance is needed in order tocompensate oilmen for the risks involved in speculative drilling,and thus insure an adequate supply of oil for national use, butmany people feel that this argument amounts to saying, “thedepletion allowance is a necessary and desirable federal subsidyto the oil industry,” and thereby scuttles itself, since grantingsubsidies to individual industries is hardly the proper task ofthe income tax.

the 1964 revenue act does practically nothing to plug theloopholes, but it does make them somewhat less useful, in thatthe drastic reduction of the basic rates on high incomes hasprobably led some high-bracket taxpayers simply to quitbothering with the less convenient or effective of the dodges.

insofar as the new bill reduces the disparity between thecode’s promises and its performance, that is, it represents akind of adventitious reform. (one way to cure all income-taxevasion would be to repeal the income tax.) however, quiteapart from the sophistry—since 1964 happily somewhatlessened—that the code embodies, it has certain discernible anddisturbing characteristics that have not been changed and maybe particularly hard to change in the future. some of themhave to do with its methods of allowing and disallowingdeductions for travel and entertainment expenses by personswho are in business for themselves, or by persons who areemployed but are not reimbursed for their business expenses—deductions that were estimated fairly recently at between fiveand ten billion dollars a year, with a resulting reduction infederal revenue of between one and two billion. thetravel-and-entertainment problem—or the t & e problem, as itis customarily called—has been around a long time, and hasstubbornly resisted various attempts to solve it. one of thecrucial points in t & e history occurred in 1930, when thecourts ruled that the actor and songwriter george m.

cohan—and therefore anyone else—was entitled to deduct hisbusiness expenses on the basis of a reasonable estimate even ifhe could not produce any proof of having paid that sum oreven produce a detailed accounting. the cohan rule, as it cameto be called, remained in effect for more than three decades,during which it was invoked every spring by thousands ofbusinessmen as ritually as moslems turn toward mecca. overthose decades, estimated business deductions grew like kudzuvines as the estimators became bolder, with the result that thecohan rule and other flexible parts of the t & e regulationswere subjected to a series of attacks by would-be reformers.

bills that would have virtually or entirely eliminated the cohanrule were introduced in congress in 1951 and again in 1959,only to be defeated—in one case, after an outcry that t & ereform would mean the end of the kentucky derby—and in1961 president kennedy proposed legislation that not onlywould have swept aside the cohan rule but, by reducing tobetween four and seven dollars a day the amount that a mancould deduct for food and beverages, would have all but putan end to the era of deductibility in american life. no suchfundamental social change took place. loud and long wails ofanguish instantly arose, from businessmen and also from hotels,restaurants, and night clubs, and many of the kennedyproposals were soon abandoned. nevertheless, through a seriesof amendments to the code passed by congress in 1962 andput into effect by a set of regulations issued by the internalrevenue service in 1963, they did lead to the abrogation of thecohan rule, and the stipulation that, generally speaking, allbusiness deductions, no matter how small, would thenceforwardhave to be substantiated by records, if not by actual receipts.

yet even a cursory look at the law as it has stood since thenshows that the new, reformed t & e rules fall somewhat shortof the ideal—that, in fact, they are shot through with absurditiesand underlaid by a kind of philistinism. for travel to bedeductible, it must be undertaken primarily for business ratherthan for pleasure and it must be “away from home”—that is tosay, not merely commuting. the “away-from-home” stipulationraises the question of where home is, and leads to the conceptof a “tax home,” the place one must be away from in order toqualify for travel deductions; a businessman’s tax home, nomatter how many country houses, hunting lodges, and branchoffices he may have, is the general area—not just the particularbuilding, that is—of his principal place of employment. as aresult, marriage partners who commute to work in two differentcities have separate tax homes, but, fortunately, the codecontinues to recognize their union to the extent of allowingthem the tax advantages available to other married people;although there have been tax marriages, the tax divorce stillbelongs to the future.

as for entertainment, now that the writers of i.r.s. regulationshave been deprived of the far-reaching cohan rule, they areforced to make distinctions of almost theological nicety, and theupshot of the distinctions is to put a direct premium on thehabit—which some people have considered all too prevalent formany years anyhow—of talking business at all hours of the dayand night, and in all kinds of company. for example,deductions are granted for the entertainment of businessassociates at night clubs, theatres, or concerts only if a“substantial and bona fide business discussion” takes placebefore, during, or after the entertainment. (one is reluctant topicture the results if businessmen take to carrying on businessdiscussions in great numbers during plays or concerts.) on theother hand, a businessman who entertains another in a “quietbusiness setting,” such as a restaurant with no floor show, mayclaim a deduction even if little or no business is actuallydiscussed, as long as the meeting has a business purpose.

generally speaking, the noisier and more confusing ordistracting the setting, the more business talk there must be;the regulations specifically include cocktail parties in thenoisy-and-distracting category, and, accordingly, requireconspicuous amounts of business discussion before, during, orafter them, though a meal served to a business associate at thehost’s home may be deductible with no such discussion at all.

in the latter case, however, as the j. k. lasser tax institutecautions in its popular guide “your income tax,” you must “beready to prove that your motive … was commercial rather thansocial.” in other words, to be on the safe side, talk businessanyhow. hellerstein has written, “henceforth, tax men willdoubtless urge their clients to talk business at every turn, andwill ask them to admonish their wives not to object to shoptalk if they want to continue their accustomed style of living.”

entertainment on an elaborate scale is discouraged in thepost-1963 rules, but, as the lasser booklet notes, perhaps alittle jubilantly, “congress did not specifically put into law aprovision barring lavish or extravagant entertainment.” instead, itdecreed that a businessman may deduct depreciation andoperating expenses on an “entertainment facility”—a yacht, ahunting lodge, a swimming pool, a bowling alley, or an airplane,for instance—provided he uses it more than half the time forbusiness. in a booklet entitled “expense accounts 1963,” whichis one of many publications for the guidance of tax advisersthat are issued periodically by commerce clearing house, inc.,the rule was explained by means of the following example:

a yacht is maintained … for the entertainment of customers. it is used25% of the time for relaxation.… since the yacht is used 75% of the timefor business purposes, it is used primarily for the furtherance of thetaxpayer’s business and 75% of the maintenance expenses … are deductibleentertainment facility expenses. if the yacht had been used only 40% forbusiness, no deduction would be allowed.

the method by which the yachtsman is to measure businesstime and pleasure time is not prescribed. presumably, timewhen the yacht is in drydock or is in the water with only hercrew aboard would count as neither, though it might be arguedthat the owner sometimes derives pleasure simply fromwatching her swing at anchor. the time to be apportioned,then, must be the time when he and some guests are aboardher, and perhaps his most efficient way of complying with thelaw would be to install two stopwatches, port and starboard,one to be kept running during business cruising and the otherduring pleasure cruising. perhaps a favoring westerly mightspeed a social cruise home an hour early, or a septemberblow delay the last leg of a business cruise, and thus tip theseason’s business time above the crucial fifty-percent figure. wellmight the skipper pray for such timely winds, since thedeductibility of his yacht could easily double his after-tax incomefor the year. in short, the law is nonsense.

some experts feel that the change in t & e regulationsrepresents a gain for our society because quite a few taxpayerswho may have been inclined to fudge a bit under generalprovisions like the cohan rule do not have the stomach or theheart to put down specific fraudulent items. but what has beengained in the way of compliance may have been lost in acertain debasement of our national life. scarcely ever has anypart of the tax law tended so energetically to compel thecommercialization of social intercourse, or penalized soparticularly the amateur spirit, which, richard hofstadterdeclares in his book “anti-intellectualism in american life,”

characterized the founders of the republic. perhaps the greatestdanger of all is that, by claiming deductions for activities thatare technically business but actually social—that is, by complyingwith the letter of the law—a man may cheapen his life in hisown eyes. one might argue that the founders, if they werealive today, would scornfully decline to mingle the social and thecommercial, the amateur and the professional, and woulddisdain to claim any but the most unmistakable expenses. but,under the present tax laws, the question would be whetherthey could afford such a lordly overpayment of taxes, or shouldeven be asked to make the choice.

it has been maintained that the code discriminates againstintellectual work, the principal evidence being that whiledepreciation may be claimed on all kinds of exhaustible physicalproperty and depletion may be claimed on natural resources,no such deductions are allowed in the case of exhaustion ofthe mental or imaginative capacities of creative artists andinventors—even though the effects of brain fag are sometimesall too apparent in the later work and incomes of suchpersons. (it has also been argued that professional athletes arediscriminated against, in that the code does not allow fordepreciation of their bodies.) organizations like the authorsleague of america have contended, further, that the code isunfair to authors and other creative people whose income,because of the nature of their work and the economics of itsmarketing, is apt to fluctuate wildly from year to year, so thatthey are taxed exorbitantly in good years and are left with toolittle to tide them over bad years. a provision of the 1964 billintended to take care of this situation provided creative artists,inventors, and other receivers of sudden large income with afour-year averaging formula to ease the tax bite of a windfallyear.

but if the code is anti-intellectual, it is probably so onlyinadvertently—and is certainly so only inconsistently. by grantingtax-exempt status to charitable foundations, it facilitates theaward of millions of dollars a year—most of which wouldotherwise go into the government’s coffers—to scholars fortravel and living expenses while they carry out research projectsof all kinds. and by making special provisions in respect to giftsof property that has appreciated in value, it has—whetheradvertently or inadvertently—tended not only to force up theprices that painters and sculptors receive for their work but tochannel thousands of works out of private collections and intopublic museums. the mechanics of this process are by now sowell known that they need be merely outlined: a collector whodonates a work of art to a museum may deduct on hisincome-tax return the fair value of the work at the time of thedonation, and need pay no capital-gains tax on any increase inits value since the time he bought it. if the increase in valuehas been great and the collector’s tax bracket is very high, hemay actually come out ahead on the deal. besides buryingsome museums under such an avalanche of bounty that theirstaffs are kept busy digging themselves out, these provisionshave tended to bring back into existence that lovable old figurefrom the pre-tax past, the rich dilettante. in recent years, somehigh-bracket people have fallen into the habit of making serialcollections—post-impressionists for a few years, perhaps, followedby chinese jade, and then by modern american painting. atthe end of each period, the collector gives away his entirecollection, and when the taxes he would otherwise have paidare calculated, the adventure is found to have cost himpractically nothing.

the low cost of high-income people’s charitable contributions,whether in the form of works of art or simply in the form ofmoney and other property, is one of the oddest fruits of thecode. of approximately five billion dollars claimed annually asdeductible contributions on personal income-tax returns, by farthe greater part is in the form of assets of one sort or anotherthat have appreciated in value, and comes from persons withvery high incomes. the reasons can be made clear by a simpleexample: a man with a top bracket of 20 per cent who givesaway $1,000 in cash incurs a net cost of $800. a man with atop bracket of 60 per cent who gives away the same sum incash incurs a net cost of $400. if, instead, this samehigh-bracket man gives $1,000 in the form of stock that heoriginally bought for $200, he incurs a net cost of only $200.

it is the code’s enthusiastic encouragement of large-scale charitythat has led to most of the cases of million-dollar-a-year menwho pay no tax at all; under one of its most peculiarprovisions, anyone whose income tax and contributionscombined have amounted to nine-tenths or more of his taxableincome for eight out of the ten preceding years is entitled byway of reward to disregard in the current year the usualrestrictions on the amount of deductible contributions, and canescape the tax entirely.

thus the code’s provisions often enable mere fiscalmanipulation to masquerade as charity, substantiating a frequentcharge that the code is morally muddleheaded, or worse. theprovisions also give rise to muddleheadedness in others. theappeal made by large fund-raising drives in recent years, forexample, has been uneasily divided between a call to goodworks and an explanation of the tax advantages to the donor.

an instructive example is a commendably thorough bookletentitled “greater tax savings … a constructive approach,”

which was used by princeton in a large capital-funds drive.

(similar, not to say nearly identical, booklets have been used byharvard, yale, and many other institutions.) “theresponsibilities of leadership are great, particularly in an agewhen statesmen, scientists, and economists must make decisionswhich will almost certainly affect mankind for generations tocome,” the pamphlet’s foreword starts out, loftily, and goes onto explain, “the chief purpose of this booklet is to urge allprospective donors to give more serious thought to the mannerin which they make their gifts.… there are many different waysin which substantial gifts can be made at comparatively lowcost to the donor. it is important that prospective donorsacquaint themselves with these opportunities.” the opportunitiesexpounded in the subsequent pages include ways of saving ontaxes through gifts of appreciated securities, industrial property,leases, royalties, jewelry, antiques, stock options, residences, lifeinsurance, and inventory items, and through the use of trusts(“the trust approach has great versatility”). at one point, thesuggestion is put forward that, instead of actually givinganything away, the owner of appreciated securities may wish tosell them to princeton, for cash, at the price he originally paidfor them; this might appear to the simple-minded to be acommercial transaction, but the booklet points out, accurately,that in the eyes of the code the difference between thesecurities’ current market value and the lower price at whichthey are sold to princeton represents pure charity, and is fullydeductible as such. “while we have laid heavy emphasis on theimportance of careful tax planning,” the final paragraph goes,“we hope no inference will be drawn that the thought andspirit of giving should in any way be subordinated to taxconsiderations.” indeed it should not, nor need it be; with theheavy substance of giving so deftly minimized, or actuallyremoved, its spirit can surely fly unrestrained.

one of the most marked traits of the code—to bring thisransacking of its character to a close—is its complexity, and thiscomplexity is responsible for some of its most far-reaching socialeffects; it is a virtual necessity for many taxpayers to seekprofessional help if they want to minimize their taxes legally,and since first-rate advice is expensive and in short supply, therich are thereby given still another advantage over the poor,and the code becomes more undemocratic in its action than itis in its provisions. (and the fact that fees for tax advice arethemselves deductible means that tax advice is one more itemon the long list of things that cost less and less to those whohave more and more.) all the free projects of taxpayereducation and taxpayer assistance offered by the internalrevenue service—and they are extensive and wellmeant—cannot begin to compete with the paid services of agood independent tax expert, if only because the i.r.s., whosefirst duty is to collect revenue, is involved in an obvious conflictof interest when it sets about explaining to people how to avoidtaxes. the fact that about half of all the revenue derived fromindividual returns for 1960 came from adjusted gross incomesof $9,000 or less is not attributable entirely to provisions of thecode; in part, it results from the fact that low-income taxpayerscannot afford to be shown how to pay less.

the huge army of people who give tax advice—“practitioners,”

they are called in the trade—is a strange and disturbing sideeffect of the code’s complexity. the exact size of this army isunknown, but there are a few guideposts. by a recent countsome eighty thousand persons, most of them lawyers,accountants, and former i.r.s. employees, held cards, grantedby the treasury department, that officially entitle them topractice the trade of tax adviser and to appear as such beforethe i.r.s.; in addition, there is an uncounted host of unlicensed,and often unqualified, persons who prepare tax returns for afee—a service that anyone may legally perform. as for lawyers,the undisputed plutocrats, if not the undisputed aristocrats, ofthe tax-advice industry, there is scarcely a lawyer in thecountry who is not concerned with taxes at one time oranother during a year’s practice, and every year there aremore lawyers who are concerned with nothing else. theamerican bar association’s taxation section, composed mostly ofnothing-but-tax lawyers, has some nine thousand members; inthe typical large new york law firm one out of five lawyersdevotes all of his time to tax matters; and the new yorkuniversity law school’s tax department, an enormous broodhen for the hatching of tax lawyers, is larger than the whole ofan average law school. the brains that go into tax avoidance,which are generally recognized as including some of the bestlegal brains extant, constitute a wasted national resource, it iswidely contended—and this contention is cheerfully upheld bysome leading tax lawyers, who seem only too glad to affirm,first, that their mental capacities are indeed exceptional, and,second, that these capacities are indeed being squandered ontrivia. “the law has its cycles,” one of them explained recently.

“in the united states, the big thing until about 1890 wasproperty law. then came a period when it was corporation law,and now it’s various specialties, of which the most important istaxes. i’m perfectly willing to admit that i’m engaged in workthat has a limited social value. after all, what are we talkingabout when we talk about tax law? at best, only the questionof what an individual or a corporation should fairly pay insupport of the government. all right, why do i do tax work?

in the first place, it’s a fascinating intellectual game—along withlitigation, probably the most intellectually challenging branch ofthe law as it is now practiced. in the second place, althoughit’s specialized in one sense, in another sense it isn’t. it cutsthrough every field of law. one day you may be working witha hollywood producer, the next day with a big real-estate man,the next with a corporation executive. in the third place, it’s ahighly lucrative field.”

hypocritically egalitarian on the surface and systematicallyoligarchic underneath, unconscionably complicated, whimsicallydiscriminatory, specious in its reasoning, pettifogging in itslanguage, demoralizing to charity, an enemy of discourse, apromoter of shop talk, a squanderer of talent, a rock ofsupport to the property owner but a weighty onus to theunderpaid, an inconstant friend to the artist and scholar—if thenational mirror-image is all these things, it has its good pointsas well. certainly no conceivable income-tax law could pleaseeverybody, and probably no equitable one could entirely pleaseanybody; louis eisenstein notes in his book “the ideologies oftaxation,” “taxes are a changing product of the earnest effortto have others pay them.” with the exception of its moreflagrant special-interest provisions, the code seems to be asincerely written document—at worst misguided—that is aimed atcollecting unprecedented amounts of money from anunprecedentedly complex society in the fairest possible way, atencouraging the national economy, and at promoting worthyundertakings. when it is intelligently and conscientiouslyadministered, as it has been of late, our national income-tax lawis quite possibly as equitable as any in the world.

but to enact an unsatisfactory law and then try tocompensate for its shortcomings by good administration is,clearly, an absurd procedure. one solution that is morelogical—to abolish the income tax—is proposed chiefly by somemembers of the radical right, who consider any income taxsocialistic or communistic, and who would have the federalgovernment simply stop spending money, though abolition isalso advanced, as a theoretical ideal rather than as a practicalpossibility, by certain economists who are looking around foralternative ways of raising at least a significant fraction of thesums now produced by the income tax. one such alternative isa value-added tax, under which manufacturers, wholesalers, andretailers would be taxed on the difference between the value ofthe goods they bought and that of the goods they sold; amongthe advantages claimed for it are that it would spread the taxburden more evenly through the productive process than abusiness-income tax does, and that it would enable thegovernment to get its money sooner. several countries, includingfrance and germany, have value-added taxes, though assupplements rather than alternatives to income taxes, but nofederal tax of the sort is more than remotely in prospect inthis country. other suggested means of lightening the burden ofthe income tax are to increase the number of items subject toexcise taxes, and apply a uniform rate to them, so as to createwhat would amount to a federal sales tax; to increase usertaxes, such as tolls on federally owned bridges and recreationfacilities; and to enact a law permitting federal lotteries, like thelotteries that were permitted from colonial times up to 1895,which helped finance such projects as the building of harvard,the fighting of the revolutionary war, and the building of manyschools, bridges, canals, and roads. one obvious disadvantage ofall these schemes is that they would collect revenue withrelatively little regard to ability to pay, and for this reason orothers none of them stand a chance of being enacted in theforeseeable future.

a special favorite of theoreticians, but of hardly anyone else, issomething called the expenditure tax—the taxing of individualson the basis of their total annual expenditures rather than ontheir income. the proponents of this tax—diehard adherents ofthe economics of scarcity—argue that it would have the primaryvirtue of simplicity; that it would have the beneficial effect ofencouraging savings; that it would be fairer than the incometax, because it would tax what people took out of the economyrather than what they put into it; and that it would give thegovernment a particularly handy control instrument with whichto keep the national economy on an even keel. its opponentscontend that it wouldn’t really be simple at all, and would beridiculously easy to evade; that it would cause the rich tobecome richer, and doubtless stingier as well; and, finally, thatby putting a penalty on spending it would promote depression.

in any event, both sides concede that its enactment in theunited states is not now politically practicable. an expendituretax was seriously proposed for the united states by secretaryof the treasury henry morgenthau, jr., in 1942, and forbritain by a cambridge economist (later a special adviser to thenational treasury) named nicholas kaldor, in 1951, thoughneither proponent asked for repeal of the income tax. bothproposals were all but unanimously hooted down. “theexpenditure tax is a beautiful thing to contemplate,” one of itsadmirers said recently. “it would avoid almost all the pitfalls ofthe income tax. but it’s a dream.” and so it is, in the westernworld; such a tax has been put in effect only in india andceylon.

with no feasible substitute in sight, then, the income taxseems to be here to stay, and any hope for better taxationseems to lie in its reform. since one of the code’s chief flawsis its complexity, reform might well start with that. efforts atsimplification have been made with regularity since 1943, whensecretary morgenthau set up a committee to study the subject,and there have been occasional small successes; simplifiedinstructions, for example, and a shortened form for taxpayerswho wish to itemize deductions but whose affairs are relativelyuncomplicated were both introduced during the kennedyadministration. obviously, though, these were mereguerrilla-skirmish victories. one obstacle to any victory moresweeping is the fact that many of the code’s complexities wereintroduced in no interest other than that of fairness to all, andapparently cannot be removed without sacrificing fairness. theevolution of the special family-support provisions provides astriking example of how the quest for equity sometimes leadsstraight to complexity. up to 1948, the fact that some stateshad and some didn’t have community-property laws resulted inan advantage to married couples in the community-propertystates; those couples, and those couples only, were allowed tobe taxed as if their total income were divided equally betweenthem, even though one spouse might actually have a highincome and the other none at all. to correct this clear-cutinequity, the federal code was modified to extend theincome-dividing privilege to all married persons. even apartfrom the resulting discrimination against single persons withoutdependents—which remains enshrined and unchallenged in thecode today—this correction of one inequity led to the creationof another, the correction of which led to still another; beforethe chinese-box sequence was played out, account had beentaken of the legitimate special problems of persons who hadfamily responsibilities although they were not married, then ofworking wives with expenses for child care during businesshours, and then of widows and widowers. and each changemade the code more complex.

the loopholes are another matter. in their case, complexityserves not equity but its opposite, and their persistent survivalconstitutes a puzzling paradox; in a system under which themajority presumably makes the laws, tax provisions thatblatantly favor tiny minorities over everybody else would seemto represent the civil-rights principle run wild—a kind ofanti-discrimination program for the protection of millionaires.

the process by which new tax legislation comes into being—anoriginal proposal from the treasury department or some othersource, passage in turn by the house ways and meanscommittee, the whole house, the senate finance committee,and the whole senate, followed by the working out of ahouse-senate compromise by a conference committee, followedby repassage by the house and the senate and, finally,followed by signing by the president—is indeed a tortuous one,at any stage of which a bill may be killed or shelved. however,though the public has plenty of opportunity to protestspecial-interest provisions, what public pressure there is is aptto be greater in favor of them than against them. in the bookon tax loopholes called “the great treasury raid,” philip m.

stern points out several forces that seem to him to workagainst the enactment of tax-reform measures, among them theskill, power, and organization of the anti-reform lobbies; thediffuseness and political impotence of the pro-reform forceswithin the government; and the indifference of the generalpublic, which expresses practically no enthusiasm for tax reformthrough letters to congressmen or by any other means,perhaps in large part because it is stunned intoincomprehension and consequent silence by the mind-bogglingtechnicality of the whole subject. in this sense, the code’scomplexity is its impenetrable elephant hide. thus the treasurydepartment, which, as the agency charged with collecting federalrevenues, has a natural interest in tax reform, is often left,along with a handful of reform-minded legislators, like senatorspaul h. douglas of illinois, albert gore of tennessee, andeugene j. mccarthy of minnesota, on a lonely and indefensiblesalient.

optimists believe that some “point of crisis” will eventuallycause specially favored groups to look beyond their selfishinterests, and the rest of the country to overcome its passivity,to such an extent that the income tax will come to give back amore flattering picture of the country than it does now. whenthis will happen, if ever, they do not specify. but the generalshape of the picture hoped for by some of those who caremost about it is known. the ideal income tax envisioned forthe far future by many reformers would be characterized by ashort and simple code with comparatively low rates and with aminimum of exceptions to them. in its main structural features,this ideal tax would bear a marked resemblance to the 1913income tax—the first ever to be put in effect in the unitedstates in peacetime. so if the unattainable visions of todayshould eventually materialize, the income tax would be justabout back where it started.