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New International, Spring 1955


George Simon

The Rich Get Richer

Eisenhower’s Program: Tax Relief for the Wealthy


From New International, Vol. XXI No. 1, Spring 1955, pp. 54–59.
Marked up up by Einde O’Callaghan for ETOL.


The Internal Revenue Code of 1954 (H.R. 8300) became law on August 16, 1954. This new Code follows in the new tradition of the “give-away” which commenced with the tidelands oil deal. However, in this instance, the Democrats did not try to make any important changes except to increase personal exemptions. After this attempt failed they went along with the “give-away” of $1,363,000,000 annually – most of it to corporations and wealthy individuals.

Here is how it was done.

Tax Benefits to Individuals

(1) Taxes on dividends received from domestic corporations were reduced by allowing an exclusion of the first $50 of dividends received and a credit against the tax payable of 4 per cent of the dividends received. A single man whose entire income for 1955 consists of $50,000 from dividends would reduce his tax bill by $2,035.50. Obviously, this provision is intended to benefit primarily those individuals with large incomes from dividends. This may explain, in part, the recent rise in price of blue-chip stocks. The new tax law makes dividends more attractive than bonds to an investor such as our hypothetical individual, since under the new law a 5 per cent dividend is equal to 5.7 per cent interest on a taxable bond insofar as net after tax proceeds is concerned. It is estimated that the total tax cut on dividends will amount to $204 millions in 1954 and $363 millions each year thereafter.

(2) Children earning $600 or more per year may still be claimed as dependents if the parents contribute more than half of the child’s support. The U.S. Department of Labor reports that the average factory worker earns approximately $72 per week or $3,744 per year. If this average worker’s son earned $600 and there were four members in the family the father could not claim him as a dependent:

Father’s income


Son’s income


Family income


Average – $4,344 divided by 4 = $1,083

Since not more than $1,083 is required to support the son, and the son earned $600, obviously the father only contributed $483, less than half, and he would lose the exemption for the son.

But this section is a boon to wealthy taxpayers. The earnings of the child are not restricted to income from employment but include income from dividends, interest, rents, oil wells, etc. A married taxpayer, with two children aged 3 and 5 (upon whom thousands of dollars per year may be lavished in the form of nurses, governesses, etc.), who has a net income of $100,000 per year can make an irrevocable gift of property, producing an income of $1,000 annually, to each of his children. Under this new provision on dependents he would save $1,380 a year in income taxes:

Tax on $2,000 of income
in father’ brackert


Tax on each $1,000 of income
in child’s bracket –
for both children


Net tax saving


Note – the irrevocable gifts would also result in substantial savings in estate taxes upon the death of the parent by removing the property from the parent’s estate at a small cost in gift taxes.

(3) Retirement income (taxable interest, rents, dividends and annuities) to the extent of $1,200 for persons over 65 is subject to a new credit against the tax computed at the lowest bracket rate. For 1954, that would be $240. The credit must be reduced by social security pensions, railroad retirement benefits, veteran’s pensions and, for persons under 75, income from wages, compensation, profession or business in excess of $900 a year.

Example: A lawyer and his secretary for the past ten years (both 65 years of age) retire at the beginning of 1954. He has income from rents of $10,000 a year so he comes under the new provision and his tax is reduced by $240. She received $500 a year from social security. If she has income from interest of $2,000 a year her tax would be reduced by only $140 a year. If, in addition to the social security and interest income, in order to maintain her living standard, she got another job paying $35 a week she would lose the credit and the tax savings in its entirety.

(4) Life insurance policies are owned by a large number of Americans including workers. Until August 16, 1954, the proceeds on death of life insurance paid in installments (monthly, quarterly, etc.) were exempt from tax. Where individuals die after August 16, 1954, the interest element in the installments is fully taxable except if received by a widow or widower of the deceased, in which case $1,000 per year of interest is exempt. The additional revenues to be derived from this source made it possible for the Congress to reduce the taxes paid by those few people who receive annuities. This was done by replacing the old “3 per cent rule” with a tax computed on the basis of the annuitant’s life expectancy. An annuitant who lives beyond his life expectancy will be able to get back more than the cost of his annuity tax-free. This will be the result in most cases since the mortality tables used by the life insurance companies to increase premium charges by not fully reflecting the currently greater life expectancy will redound to the benefit of annuitants. The new law also permit the annuitant who has lived beyond his life expectancy to sell the annuity and pay tax only on the proceeds, even though he has recovered more than his cost tax-free.

Annual payment



Consideration paid for contract in 1954


Expected return ($10,000
15 × years of life expectancy)


Annual exclusion
(100/150 of $10,000)


If annuitant lives 20 years he will recover $33,333 more than his cost tax-free.

(5) Deductions for charitable contributions have been liberalized for both corporations and individuals. The most important change is one giving an individual (in addition to the limitation to 20 per cent of adjusted gross income) an additional 10 per cent for contributions to regular educational institutions, hospitals and churches. It is estimated that 160,000 taxpayers will save $25 millions in taxes as a result of this change. Obviously the benefit goes to those in the very top brackets so that giving to charity is almost painless. The additional 10 per cent had to be limited to recognized institutions to keep the funds from going into “charitable” foundations controlled by the donor where the funds could be used for the donor’s benefit (for instance buying the stock of a closely-held corporation to reduce the donor’s income and estate taxes).

The new Code continued the scandalous provisions which permitted wealthy taxpayers to make a cash profit on charitable contributions. Example: An individual with a net income of $500,000 per annum owns a piece of vacant real estate near Morningside Heights which cost him $70,000 in 1944 and has a market value today of $150,000. He donates this land to Columbia University. If he had sold the land he would have paid a capital gains tax of $20,000 and he would have saved $118,300 in taxes on the net proceeds of $130,000 in cash donated to the university, or a net saving of $98,300. By donating the land to the university he eliminated the $20,000 tax and saves $136,500 in taxes on the $150,000 value of the land deducted on his return as a contribution or a net savings of $156,500. He has more cash in his pocket as a result of donating the property than if he had sold it and kept the proceeds.

(6) The big stock brokerage partnerships were given tax relief by permitting them to elect to be taxed as corporations at a top rate of 52 per cent instead of the rates up to 91 per cent to which they were subject.

(7) The hobby loss provision, under which a taxpayer who sustains business losses of more than $50,000 for each of five consecutive years loses any deduction for the amounts over $50,000 has been liberalized by excluding from the $50,000 limit casualty losses, losses and expenses attributable to drought, abandonment losses, loss carry-overs and carry-backs and intangible drilling and development costs of oil and gas wells. This makes it even easier for people in the high brackets to indulge in race horses, cattle ranches and drilling for gas and oil.

(8) Other provisions effecting a reduction of taxes for individual taxpayers include provision for losses on sale of business assets as part of a net operating loss to be carried back two years and carried forward five years, liberalized rules for stockholders of liquidated corporations affected by the rule of the Arrowsmith case (344 U.S. 6), reduction of penalties and interest relating to estimated tax payments, liberalizing the impact of disallowed losses between related taxpayers; extending capital gains provisions to subdividing real estate.

Tax Breaks for Corporations

(1) It is estimated that the new depreciation provisions permitting fast write-offs to the original user of new property will reduce taxes 323 millions for corporations the first year and much more over the next few years. No one has noticed that there may be a double benefit: – the corporation not only receives the fast write-off but reports any gains as a capital gain at the lower rates.

Example: A corporation buys a machine for $100,000 on January 1, 1954 with an estimated life of 10 years. At the end of 4 years the machine is sold for $60,000. Under the old method the tax reduction would have been 52 per cent of $40,000 or $20,800. Under the new method the tax reduction would be 52 per cent of $61,820 minus 25 per cent of $21,820 or $26,691.40, a saving of $5,891.40.

(2) Research and development expenditures which were not deductible under the Treasury’s ruling in the past may now be deducted as an expense in the year they are incurred or written off over 5 years or more according to the taxpayer’s elections. The work should be creating a valuable asset in spite of the fact that all of the costs are immediately deductible. If the resulting product is valuable it can be used in the business or sold subject only to tax at capital gains rates.

(3) Municipalities and chambers of commerce have been offering building, land, and other financial advantages to corporations to settle in their communities. The new law provides that all contributions to corporate capital (including those mentioned above) are to be excluded from gross income of the corporation and are not subject to income tax except if sold subsequently, in which case the proceeds would be subject only to capital gains rates under Section 1231.

This should encourage those corporations which are planning on running away from towns with strong unions to open-shop towns which are presenting the inducements of cheap labor and free plants.

(4) Regulated public utilities are no longer subject to the 2 per cent additional tax for filing consolidated returns. American Telephone and Telegraph Co., according to the Wall Street Journal, reported a net income of $142,980,000 (including dividend income of $121,380,000) for the three months of July, August and September 1954.

Tax savings is 2 per cent of $13,230,000 of net operating revenue plus 2 per cent of 15 per cent of dividends received of $121,330,000, or a total savings of $628,590 for the three months.

(5) A corporation may now adapt a plan of complete liquidation and, within 12 months, sell all of the corporate assets and distribute the proceeds to its stockholders without paying any corporate tax on the gain to the corporation. Under old law such gain would be taxed to the corporation and to the stockholders.

Corporation sells all of its assets at a profit of $500,000, dissolves and distributes the proceeds to its stockholders. Under the new law the stockholders pay a tax of $125,000. Under the old law the corporation would have paid a tax of $125,000 and the stockholders would have paid an additional tax of $93,750.

(6) Corporations and individuals are allowed to carry back losses for two years (instead of 1) and to carry forward losses for 5 years, thereby establishing an 8-year period over which to absorb losses. The additional year of carryback will be of immediate tax aid to those companies (such as the independent automobile manufacturers) which had large profits in 1952 and small profits or losses in 1953.

Under the old law an operating loss carryback had to be reduced to the actual economic loss sustained in the year of loss and in the year to which the loss was carried. The new Code eliminated 3 important items from this adjustment in the year of loss: (a) fully tax exempt interest; (b) the corporate dividends received credit (primarily the limitation that taxes only 15 per cent of dividends received), (c) percentage depletion (the arbitrary exclusion of a percentage of the gross income). In addition, no adjustments are to be made to reduce the loss of a year to which a loss is carried.

Example: Loss for 1954 under new law


Interest on tax-exempt municipal bonds

Dividends received



Less – credit



Excess of percentage depletion over cost depletion on oil wells


Net economic loss and loss to carryback under old law


If the carryback is to a year when the corporation earned $1,500,000 (assuming no excess profits tax liability) the corporation will save 52 per cent of $385,000, or $200,200 under the new law.

(7) The penalty surtax for unreasonable accumulations of earnings by corporations, which served so effectively to force the payment of dividends to stockholders of closely held corporations, lost most of its effectiveness by the changes introduced in Sections 534 and 535 of the new Code. The first $60,000 of accumulated earnings is exempt from the penalty tax under Section 531. Accumulated funds can be retained for the reasonably anticipated needs of the business. For all practical purposes the burden of proof has shifted to the government, which is a definite advantage in any future litigation in the U.S. Tax Court. The door has been opened wide for unrelated investments in securities, oil wells, timber lands, real estate, etc.

(8) Other provisions granting tax benefits to corporations and individuals in high brackets include an extensive liberalization of the reorganization provisions: carryover to successor corporations of net operating loss carryovers, capital loss carryovers, inventory pricing, prepaid income, deferred expenses, earnings or deficits, etc.; a bank which owns 80 per cent of each class of stock of another bank is entitled to an ordinary loss deduction if the stock becomes worthless, instead of being subject to the capital loss limitations; personal holding companies get relief by increasing the personal holding income test to 80 per cent each year, and by being exempt from the tax on personal holding companies (75 per cent on the first $2,000, 85 per cent on the balance) if they qualify for inclusion in a group filing consolidated returns; all minerals are now subject to percentage depletion, and the deduction is extended to deposits of waste or residue worked by the mine owner or operator.

Estate and Gift Tax Reductions

(1) Since the estate tax strikes only individuals whose net estate is in excess of $60,000 ($120,000 in the case of a married person using the maximum marital deductions) only a small percentage of taxpayers are affected. The amounts involved, however, are large. It is estimated that the Treasury will lose $25 millions each year from the 10,000 decedents who can now transfer large insurance estates at death without estate tax by an irrevocable assignment to the beneficiaries prior to death.

(2) The 1950 provisions permitting capital gains treatment for stock redemptions to pay death taxes has been liberalized to include funeral and administrative expenses; two or more corporations more than 75 per cent of which is owned by the decedent are treated as a single corporation now to meet the percentage rules.

(3) Other provisions granting tax benefits to estates include extending the credit for property taxed in an earlier estate; more flexibility in passing property to a wife which will qualify for the marital deduction; permitting the deduction of expenses of administering property in the probate estate; permitting property to be transferred in trust for the grantor’s lifetime (if the reversionary interest is less than 5 per cent) without fear of estate tax; granting all property included in the decedent’s estate the value at death (or optional valuation date) as the basis for future income tax computations (this will be of particular benefit in cases involving transfers determined to be made in contemplation of death).

(4) Changes in the gift tax law include broadening the gift tax exclusion for gifts in trust to minors; permitting the creation of joint tenancies and tenancies by the entirety, where the wife does not contribute her full share, without being subject to gift tax.

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