CAPITAL FORMATION AND THE USE OF CAPITAL.

A first step in the consideration of tax reform with reference to the formation and use of capital is an appraisal of present tax system. The degree of progression in an individual tax influences capital formation. Studies of the relative disposition to save and consume income at different income levels provide a basis for some confidence in appraising the significance of changes in the rate structure. It seems reasonable and probable that a highly progressive individual income tax especially restricts the amount of savings by falling most heavily on those segments of income from which savings are greatest. A highly progressive income tax is also most likely to repress incentives and divert efforts away from the creation of income toward the minimization of taxes, a form of activity in which the gain to the individual adds nothing to the national welfare, to say the least. In the absence of a desire to restrict savings, the case for high individual income tax rates can be defended only on grounds of equity or as a means of redistributing income. Fortunately, even those who support high rates for these noneconomic reasons now seem to be in substantial agreement that the adverse economic effects make a continuation of very high rates undesirable. It must also be remembered, in any consideration of the effects of taxation on the use of capital owned by individuals, that there are virtually no nonpecuniary incentives for its employment, as there are for personal activity.