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II. PROPOSED CHANGES IN THE ESTATE AND GIFT TAXES

(1)  SUBSTITUTE FOR THE SPECIFIC EXEMPTION A CREDIT AGAINST THE
     ESTATE TAX EQUAL TO THE TAX ON THE FIRST $25,000 OF THE NET
     ESTATE.

     There are two elements to this proposal:

     (a)  The amount exempt from tax should be reduced from the
          present $40,000 to $25,000; and

     (b)  The relief from tax on account of this exemption should be
          equal for all sizes of estates.

Under the present procedure (as shown in the following table) the relief from taxes is greater for the large estates than for the small. This defect is similar to the one which was described in connection with the criticism of the present method of allowing the personal exemption and credit for dependents as a credit for surtax purposes. The remedy proposed is also similar.

The vanishing exemption is an alternative procedure for improving the method of granting relief from tax to small estates. According to this method, no relief whatsoever is afforded the very large estates, the full amount of specific exemption is allowed the small estates, and for the middle size estates, the amount of specific exemptions becomes smaller as the size approaches the class of large estates, at which point the specific exemption disappears. The rate at which the exemption should vanish and the size of estates which should be allowed the maximum exemption are matters to be determined on the same basis as is the size of the present specific exemption.

The method of vanishing exemptions is a little more complex than the proposed method. Also, it makes a radical departure from present and past practice. The relief afforded by this method, if maximum exemptions were $40,000 (or alternatively $25,000) for estates of $75,000 and under and vanished at the rate of $500 for each additional $1,000 net estate (before specific exemption), is shown in the following table in comparison with the proposal and the present method:


[Part 1 of 2]

-------------------------------------------------

Net estate  Specific   Proposed   Under proposed 
 (Before    exemption    tax          method     
 specific    present    credit                   
exemption)     law        on     If tax   If tax 
                                 credit   credit 
                                 were on  were on
                                 $40,000  $25,000

-------------------------------------------------
   $50,000    $40,000   $25,000   $2,000     $900
    80,000     40,000    25,000    2,000      900
   250,000     40,000    25,000    2,000      900
 5,000,000     40,000    25,000    2,000      900
-------------------------------------------------

[Part 2 of 2]

------------------------------------
 Relief from tax                    

  Under present     Under vanishing 
      method           method /1/   

   If        If       If       If   
specific  specific  maximum  maximum
  were      were      is       is   
$40,000   $25,000   $40,000  $25,000

------------------------------------
  $2,800    $2,100   $2,800   $2,100
   4,800     3,200    4,550    2,900
   8,000     5,000     none     none
  21,200    13,250     none     none
------------------------------------
                         FOOTNOTES TO TABLE

     /1/ The specific exemption is assumed to be at its maximum for
net estates (before specific exemptions) of $75,000 or less and to
vanish at the rate of $500 for each additional $1,000 of net estate
(before specific exemption).

                          END OF FOOTNOTES

(2)  ADOPT A HIGH RATE SCALE BUT ONE WHICH WILL FALL MORE HEAVILY
     UPON ESTATES UNDER $1,000,000.

The rates on the small and middle sized estates are at present too low. This may be seen clearly if the rates are converted to an effective basis. These low rates contribute substantially to the relatively low yield of the death taxes in the United States when compared with Great Britain. The British, with a smaller population and less resources, count on approximately $400,000 annually from their death taxes. This amount is in excess of the combined amounts of Federal and State death taxes collected in the United States for any year and is exceeded by only a small margin in the estimates for the fiscal year 1938.

In the present law there are twelve brackets in the rate scale for estates of $1,000,000 and under as against sixteen brackets for size of estates above $1,000,000. The scale differentiates too minutely among large estates and inadequately for the small and middle sized estates. In the proposed scale (shown below) there are nineteen brackets for size of estates $1,000,000 and under as against four brackets for size of estates over $1,000,000.


                    Proposed estate tax schedule

--------------------------------------------
      Net estate         Rate of            
                           tax     Total tax
Exceeding   Equalling   (percent)           
(Thousands of dollars)                      

--------------------------------------------
      0              5      4          $ 200
      5             10      6            500
     10             20      8          1,300
     20             30     10          2,300
     30             40     12          3,500
     40             50     14          4,900
     50             60     16          6,500
     60             70     18          8,300
     70             80     20         10,300
     80             90     22         12,500
     90            100     24         14,900
    100            150     27         28,400
    150            200     31         43,900
    200            250     36         61,900
    250            300     42         82,900
    300            400     47        129,900
    400            500     51        180,900
    500            750     54        315,900
    750          1,000     56        455,900
  1,000          3,000     57      1,595,900
  3,000          6,000     58      3,335,900
  6,000         10,000     59      5,695,900
 10,000 up                 60               
--------------------------------------------

The proposed estate tax rate scale beginning at the level of approximately $40,000 of not estate is substantially more severe *** either our present law or the British law but the British tax all not estates if they are in excess of 1100 without allowing any specific exemption whereas under the proposal net estates under $25,000 would not be taxed at all and those between $25,000 and $40,000 would be taxed at lower rates than in Great Britain. The proposal assumes that both in Great Britain and the United States the estates over $40,000 are not adequately taxed in comparison with the high income taxes and considering the revenue requirements of the Government.

The effective estate tax rates,


     (a)  under the present United States law;

     (b)  under the British law;

     (c)  under the present United States law modified by
          substituting for the specific exemption a credit against
          the tax equal to the tax on the first $25,000 of net
          estate; and

     (d)  under proposed rates and tax credit on $25,000.

are shown in the following table and chart:

Effective estate tax rates under (1) present United States law, (2) British law, (3) present United States law combined with a tax credit on $25,000 substituted for the specific exemption, (4) proposed rates combined with a tax credit on $25,000 substituted for the specific exemption


---------------------------------------------------------
                               United States   Proposed  
                               present law,   rates with 
                                 with tax     tax credit 
Net estate   United   British    credit on    on $25,000 
(Thousands   States   present     $25,000     substituted
of dollars)  present    law     substituted       for    
               law             for specific    specific  
                                 exemption     exemption 

---------------------------------------------------------
        2        -       1           -             -     
        5        -       2           -             -     
       10        -       3           -             -     
       20        -       3           -             -     
       30        -       4          1.0           1.7    
       40        -       4          2.8           4.3    
       50       .4       4          4.2           6.2    
       70      1.7       6          6.4           9.3    
       80      2.5       7          7.4          10.6    
       90      3.3       7          8.1          11.9    
      100      4.2       8          8.7          13.1    
      150      7.5      10         11.5          17.7    
      200      9.9      12         12.9          21.1    
      300     12.9      16         15.2          27.0    
      400     14.7      18         16.4          32.0    
      500     16.1      19         17.7          35.8    
      600     17.2      20         18.6          38.9    
      700     18.3      22         19.7          41.0    
      800     19.3      24         20.5          42.8    
      900     20.2      24         21.4          44.2    
    1,000     21.1      24         22.2          45.4    
    1,250     23.2      26         24.1          47.7    
    1,500     24.7      28         25.4          49.3    
    1,750     26.1      30         26.8          50.4    
    2,000     27.2      30         27.8          51.2    
    2,500     29.3      32         29.9          52.4    
    3,000     31.2      34         31.7          53.1    
    3,500     33.0      36         33.5          53.8    
    4,000     34.7      36         35.2          54.4    
    4,500     36.4      38         36.8          54.8    
    5,000     38.0      38         38.4          55.1    
    6,000     41.0      40         41.4          55.6    
    8,000     45.7      45         46.0          56.4    
    9,000     47.6      45         47.9          56.7    
   10,000     49.4      45         49.6          56.9    
---------------------------------------------------------

            EFFECTIVE ESTATE TAX RATES IN U. S. AND U. K.

     [graphic omitted]

In interpreting the data in the table and chart, it should be pointed out that the British have certain supplemental death duties in addition to the estate duty and that in the United States the State death taxes for the smaller estates are frequently in excess of the credit allowed them by the Federal Government.


(3)   *** THE PRESENT DEFINITION OF "NET GIFTS" IN SECTION 504 (a) OF
     THE REVENUE ACT OF 1932 BY STRIKING OUT SECTION 504 (b);
     SUBSTITUTE FOR THE SPECIFIC EXEMPTION A TAX CREDIT COMPUTED ON
     AN AMOUNT NOT EXCEEDING $25,000; AND RAISE THE GIFT TAX RATES TO
     ALIGN WITH THE PROPOSED INCREASED ESTATE TAX RATES.

     Section 504 (b) reads as follows:

     "Gifts less than $5,000--in the case of gifts (other than of
     future interests in property), made to any person by the donor
     during the calendar year, the first $5,000 of such gifts to such
     person shall not, for the purposes of subsection (a), be
     included in the total amount of gifts made during such year."

Section 504 (b) would seem to allow an unreasonable expansion of the amount of gifts that might become exempt from tax. The proposed *** would plug this loophole. The reason for the change with respect to the specific exemption is the same as that outlined under (2) above.

The proposed gift tax rates aligned to maintain the present relationship with the estate tax rates are as follows:


                     Proposed gift tax schedule

----------------------------------------------
   Amount of net gift      Rate of            
  Exceeding    Equalling     tax     Total tax
 (Thousands of dollars)   (percent)           

----------------------------------------------
     0                 5     3             150
     5                10     4-1/2         375
    10                20     6             975
    20                30     7-1/2       1,725
    30                40     9           2,625
    40                50    10-1/2       3,675
    50                60    12           4,875
    60                70    13-1/2       6,225
    70                80    15           7,725
    80                90    16-1/2       9,375
    90               100    18          11,175
   100               150    20-1/4      21,300
   150               200    23-1/4      32,925
   200               250    27          46,425
   250               300    31-1/2      62,175
   300               400    35-1/4      97,425
   400               500    38-1/4     135,675
   500               750    40-1/2     236,925
   750             1,000    42         341,925
 1,000             3,000    42-3/4   1,196,925
 3,000             6,000    43-1/2   2,501,925
 6,000            10,000    44-1/4   4,271,925
10,000 and up               45                
----------------------------------------------

III. THE MISCELLANEOUS EXCISE TAXES RANKED IN THE ORDER IN WHICH THEY SHOULD BE ELIMINATED.

According to provisions of the present statutes, some of the miscellaneous excise taxes lapse on June 30, 1937; some lapse on July 31, 1937; and some will have important changes in rate and base after June 30, 1937. A number of the taxes imposed by the Revenue Act of 1932 and subsequent acts and those enacted before 1932 are without expiration dates and therefore will continue in force unless repealed by non-legislation.

It may not be possible to remove all the taxes at once even if it is agreed that they should all be eliminated from the Federal revenue system. For this reason the taxes are ranked in the table below in the order in which they should be eliminated. The taxes are distributed into three groups:


     A.   Taxes weighted against the general public;

     C.   Taxes weighted against special classes of consumers: and

     B.   Taxes occupying an intermediate position between those of A
          and C.

The major criterion that governs the ranking of the taxes is whether the taxes are, through shifting, generally diffused no as to become a burden upon the general public--rich and poor--or whether the taxes are shifted for the most part to specific users of the items to which the taxes relate, thus burdening special classes of consumers.

In general, if the tax enters into the cost of doing business so that it becomes an element in the cost of the products sold by the business, the tax is included in group A. In addition, if the tax is shifted to a special class of consumers, but if this special class of consumers is considered to be so large as to be identical for all practical purposes with the general public, then the tax is also included in group A. If, on the other hand, there does not seem to be any opportunity for the tax to become included as an element in costs of doing business--that is, the tax is shifted to special classes, users of the item affected by the tax, then the tax is included in class C. The cases that would not neatly fit into either A or C were included in group B because part of the tax might become generally diffused and part might burden special classes. Further, when the item affected by the tax has a short useful life and passes through one market during that useful life, it was considered to be a better object for taxation than an item that has a longer useful life during which it passes through several markets presenting several opportunities for the shifting of the tax. Considerations of this type, however, are secondary to the chief criterion, namely, whether the tax does or does not become an element in the cost of doing business and the burden is diffused to the general public.

In ranking the taxes within the groups A, B or C, certain subsidiary criteria were relied upon to some extent, for example, Bureau officials' judgments with respect to cost of administration and taxpayers' costs of compliance (there is no specific information on either); administrative difficulties relating to such matters as the determination of the tax base and exemptions; whether the tax is in conflict with other Federal and similar State taxes; etc., but the information for the practical application of most of these subsidiary criteria is too indefinite to be satisfactory. The ranking of the taxes within the groups A, B or C is, therefore, less reliable than the distribution of the taxes into the respective groups.

The following discussion illustrates the method used in distributing the taxes into the groups:

The tax on trucks will affect in first instance the price of the truck to the purchaser and, secondarily, the cost of doing business for types of concerns that serve the general public, so that the tax on trucks ultimately becomes diffused to the general public and so falls into group A.

The tax on passenger cars is passed in first instance to the user of the passenger car, and to the extent that it is not used for commercial purposes the tax affects the special class of automobile owners and falls into group C.

The tax on passenger car accessories is passed on to the users of passenger cars and to the extent that they are not used for commercial purposes this tax also affects a special class of consumers and so falls into class C. As between the tax on passenger cars and the tax on its accessories, the first owner of a passenger car is less likely to own the car for the duration of its life than the first owner of accessories (or tires and tubes) so that the passenger car is more likely to pass through several markets and the corresponding tax through several opportunities for shifting than is the tax on automobile accessories or tires and tubes. If it becomes a matter of ranking the tax on the passenger car and the tax on its accessories, the recommendation will be that the tax on passenger cars be removed first.

Further, if it becomes a matter of deciding whether the tax on the issue of stocks should be removed before the tax on the transfer of stocks, the reasoning will be something as follows: The tax on the issue of stocks affects the cost of procuring capital for the conduct of business and, as such, becomes generally diffused to the public. This tax will fall into group A. The tax on the transfer of the stock is less directly connected with the cost of procuring capital for the conduct of business and affects a special class and so will be relegated to class C.

The tax on matches was placed in class A because this item is one used by the general public. The tax on chewing gum, which is perhaps as widely used as matches, was left in group C because of a subsidiary consideration, namely, that chewing gum is perhaps less essential to the well-being of society than matches. It should be made clear that whenever it was found necessary to rely upon subsidiary considerations, the ranking became correspondingly less reliable.


       Miscellaneous excise taxes ranked in the order in which
                      they should be eliminated

     (for details relating to base and rate of tax see appendix)

---------------------------------------------------------------------
                                        Group B - Taxes occupying an 
                                        intermediate position Groups 
  Group A. - Taxes weighted against     A and C and which should not 
        the general public and           eliminated before those in  
   which should be eliminated first                Group A           

---------------------------------------------------------------------
*** *** preparations                    a. Brewer's wort and         
    (items subject to                      malt products             
    5% rate only)                                                    
*** ***                                 d. Refining or processing    
                                           of crude petroleum        
*** Electrical energy                   a. Transportation of oil     
                                           by pipe line              
*** Admissions -- general               d. Producing or recovering   
                                           gasoline from ***         
*** Automobile trucks                   d. Sale of crude petroleum   
*** *** oils                            a. Crude petroleum, imports  
*** *** oils, imports                   a. Radio sets, phonograph    
                                           records, etc.             
*** Telephone, telegraph, etc.          a. Sporting goods            
*** Issues of capital stock             b. Automobiles and           
                                           motorcycles               
*** Issues of bonds                     a. Gasoline                  
*** Processing of certain oils          a. Gasoline, imports         
*** *** petroleum wax                   b. Automobile accessories    
    products, imports                                                
*** Coal, coke, etc., imports           b. Tires and inner tubes     
*** ***, imports                        c. Sales of produce for      
                                           future delivery           
*** Copper and copper concentrates,                                  
    imports                                                          

         Group C - Taxes weighted against special classes of         
            consumers and which should not be eliminated             
                   before these in Groups A and B                    

*** Use of safe deposit boxes           c. Transfer of capital stock 
*** Mechanical refrigerators            a. Transfer of bonds         
*** Cameras and lenses                  a. Conveyances               
*** Club dues, etc.                     e. Admissions to roof        
                                           gardens, etc.             
*** Passage tickets                     e. Admissions, leases of     
                                           boxes, etc.               
*** Playing cards                       e. Pistols and revolvers     
*** Chewing gum                         e. Excess admissions charged 
                                           by proprietors            
*** Articles made of fur                e. Excess admissions at      
                                           places other than ticket  
                                           office of theatre,        
                                           etc.                      
*** ***, shells, etc.                                                
*** Toilet preparations (items subject  e. Transfer of interest      
    to 10% rate only)                      in silver bullion         
---------------------------------------------------------------------
                         FOOTNOTES TO TABLE

     Expires on June 30, 1937.

     Expires on July 31, 1937.

     Important changes in rate or base become effective after June
30, 1937.

     *** by Revenue Act of 1932, or subsequent acts, and is without
expiration date.

     *** prior to 1932 and is without expiration date.

                          END OF FOOTNOTES
 
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