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Special Message to the Congress on Reform of the Federal Tax System.

April 21, 1969

To the Congress of the United States:

Reform of our Federal income tax system is long overdue. Special preferences in the law permit far too many Americans to pay less than their fair share of taxes. Too many other Americans bear too much of the tax burden.

This Administration, working with the Congress, is determined to bring equity to the Federal tax system. Our goal is to take important first steps in tax reform legislation during this session of the Congress.

The economic overheating which has brought inflation into its fourth year keeps us from moving immediately to reduce Federal tax revenues at this time. Inflation is itself a tax--a cruel and unjust tax that hits hardest those who can least afford it. In order to "repeal" the tax of inflation, we are cutting budget spending and have requested an extension of the income tax surcharge.

Although we must maintain total Federal revenues, there is no reason why we cannot lighten the burden on those who pay too much, and increase the taxes of those who pay too little. Treasury officials will present the Administration's initial group of tax reform proposals to the Congress this week. Additional recommendations will be made later in this session. The overall program will be equitable and essentially neutral in its revenue impact. There will be no substantial gain or loss in Federal revenue, but the American taxpayer who carries more than his share of the burden will gain some relief.

Much concern has been expressed because some citizens with incomes of more than $200,000 pay no Federal income taxes. These people are neither tax dodgers nor tax cheats. Many of them pay no taxes because they make large donations to worthy causes, donations which every taxpayer is authorized by existing law to deduct from his income in figuring his tax bill.

But where we can prevent it by law, we must not permit our wealthiest citizens to be 100% successful at tax avoidance. Nor should the Government limit its tax reform only to apply to these relatively few extreme cases. Preferences built into the law in the past--some of which have either outlived their usefulness or were never appropriate--permit many thousands of individuals and corporate taxpayers to avoid their fair share of Federal taxation.

A number of present tax preferences will be scaled down in the Administration's proposals to be submitted this week. Utilizing the revenue gained from our present proposals, we suggest tax reductions for lower-income taxpayers. Further study will be necessary before we can propose changes in other preferences, and as these are developed we will recommend them to the Congress.

Specifically, the Administration will recommend: --Enactment of what is in effect a "minimum income tax" for citizens with substantial incomes by setting a 50% limitation on the use of the principal tax preferences which are subject to change by law.

This limit on tax preferences would be a major step toward assuring that all Americans bear their fair share of the Federal tax burden.

--Enactment of a "low income allowance," which will remove more than 2,000,000 of our low income families from the Federal tax rolls and assure that persons or families in poverty pay no Federal income taxes.

This provision will also benefit students and other young people. For example, the person who works in the summer or throughout the year and earns $1,700 in taxable income-and now pays $117 in Federal income taxes--would pay nothing.

The married couple--college students or otherwise--with an income of $2,300 and current taxes of $100 would pay nothing. A family of four would pay no tax on income below

$3,500---the cutoff now is $3,000. The "low income allowance," if enacted by the Congress, will offer genuine tax relief to the young, the elderly, the .disadvantaged and the handicapped.

Our tax reform proposals would also help workers who change jobs by liberalizing deductions for moving expenses and would reduce specific preferences in a number of areas:

--taxpayers who have certain nontaxable income or other preferences would have their non-business deductions reduced proportionately.

--certain mineral transactions (so-called "carved out" mineral production payments and "ABC" transactions) would be treated in a way that would stop artificial creation of net operating losses in these industries.

--exempt organizations, including private foundations, would come under much stricter surveillance.

--the rules affecting charitable deductions would be tightened--but only to screen out the unreasonable and not stop those which help legitimate charities and therefore the nation.

--the practice of using multiple subsidiaries and affiliated corporations to take undue advantage of the lower tax rate on the first $25,000 of corporate income would be curbed.

--farm losses, to be included in the "limitation on tax preferences," would be subject to certain other restrictions in order to curb abuses in this area.

I also recommend that the Congress repeal the 7% investment tax credit, effective today.

This subsidy to business investment no longer has priority over other pressing national needs.

In the early 60's, America's productive capacity needed prompt modernization to enable it to compete with industry abroad. Accordingly, Government gave high priority to providing tax incentives for this modernization.

Since that time, American business has invested close to $400 billion in new plant and equipment, bringing the American economy to new levels of productivity and efficiency. While a vigorous pace of capital formation will certainly continue to be needed, national priorities now require that we give attention to the need for general tax relief.

Repeal of the investment tax credit will permit relief to every taxpayer through relaxation of the surcharge earlier than I had contemplated.

The revenue effect of the repeal of the investment tax credit will begin to be significant during calendar year 1970. Therefore, I recommend that investment tax credit repeal be accompanied by extension of the full surcharge only to January 1, 1970, with a reduction to 5% on January 1. This is a reappraisal of my earlier recommendation for continuance of the surcharge until June 30, 1970 at a 10% rate. If economic and fiscal conditions permit, we can look forward to elimination of the remaining surtax on June 30, 1970.

I am convinced, however, that reduction of the surtax without repeal of the investment tax credit would be imprudent.

The gradual increase in Federal revenues resulting from repeal of the investment tax credit and the growth of the economy will also facilitate a start during fiscal 1971 in funding two high-priority programs to which this Administration is committed:

--Revenue sharing with State and local governments.

--Tax credits to encourage investment in poverty areas and hiring and training of the hard-core unemployed. These proposals, now in preparation, will be transmitted to the Congress in the near future.

The tax reform measures outlined earlier in this message will be recommended to the House Ways and Means Committee by Treasury officials this week. This is a broad and necessary program for tax reform. I urge its prompt enactment.

But these measures, sweeping as they are, will not by themselves transform the U.S. tax system into one adequate to the long-range future. Much of the current tax system was devised in depression and shaped further in war. Fairness calls for tax reform now; beyond that, the American people need and deserve a simplified Federal tax system, and one that is attuned to the 1970'S.

We must reform our tax structure to make it more equitable and efficient; we must redirect our tax policy to make it more conducive to stable economic growth and responsive to urgent social needs.

That is a large order. Therefore, I am directing the Secretary of the Treasury to thoroughly review the entire Federal tax system and present to me recommendations for basic changes, along with a full analysis of the impact of those changes, no later than November 30, 1969.

Since taxation affects so many wallets and pocketbooks, reform proposals are bound to be controversial. In the debate to come on reform, and in the even greater debate on redirection, the nation would best be served by an avoidance of stereotyped reactions. One man's "loophole" is another man's "incentive." Tax policy should not seek to "soak" any group or give a "break" to any other--it should aim to serve the nation as a whole.

Tax dollars the Government deliberately waives should be viewed as a form of expenditure, and weighed against the priority of other expenditures. When the preference device provides more social benefit than Government collection and spending, that "incentive" should be expanded; when the preference is inefficient or subject to abuse, it should be ended.

Taxes, often bewailed as inevitable as death, actually give life to the people's purpose in having a Government: to provide protection, service and stimulus to progress.

We shall never make taxation popular, but we can make taxation fair.

RICHARD NIXON

The White House

April 21, 1969

Richard Nixon, Special Message to the Congress on Reform of the Federal Tax System. Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/238893

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