Postwar Taxation and Economic Progress

By Harold M. Groves | Go to book overview

III. INTEGRATION AND THE TREATMENT OF UNDISTRIBUTED PROFITS

THE CAUSE FOR ACTION: TAX DISCRIMINATION

DISINTERESTED writers are generally agreed that the present tax treatment of undistributed corporate earnings is unsatisfactory. The present system applies two taxes to income that passes through the corporation and one to income that is reinvested by the company. It allows an individual to become indefinitely rich for an indefinite period without paying any personal-income tax. To be sure, the tax system may "catch up" with such an individual through the taxation of realized capital gains or through application of the death tax to his estate, but the realization of capital gains can be postponed as long as stock continues to be owned by the same stockholder. It may be further postponed as long as the stock is retained by the heirs of the original owner or the heirs of the heirs, and so on.1 The death tax is only a delayed and partial compensation for privileges enjoyed in the application of the tax system during the life of the deceased. Thus a strong case in terms of equity can be made for a relatively more rigorous application of the tax system to undistributed profits. In addition, the apparent necessity for at least one levy on undistributed earnings has been used to justify the unfortunate duplication of corporate and personal levies.

Some consider it wrong to include savings in the base of an

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1
Moreover, as the law is presently applied, the basis for the gain in the hands of an heir is not the basis of the decedent; nor is the basis for a donee necessarily that of the donor. In the first instance, the value at the time of the death transfer serves as the new basis; in the second, the basis used is that in the hands of the donor in the case of a gain and the donor's basis or the value at the time of the transfer, whichever is lower, in the case of a loss.

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