February 15, 1939

Mr. Blough

Mr. Atlas

Subject: General sales taxation, 1921

During the consideration of the Revenue Bill of 1921 a great deal of attention was paid by both the House and Senate Committees to the possibilities of a general sales tax. One of the suggestions to receive considerable attention was the sales tax provisions of the bill introduced by Mr. Smooth in the Senate on April 15, 1921, and cited as "The Sales Tax Act, 1921" although the discussion was directed toward the desirability of a general sales tax rather than the particulars of the bill itself.

1. PROVISIONS OF THE SMOOTH SALES TAX BILL

(a) BASE - sale or lease price of all goods, wares or merchandise sold or leased after July 1, 1921.

(b) RATE - 1 percent

(c) EXEMPTIONS

(1) In computing the tax every taxpayer was to be entitled to an annual exemption of $6,000.

(2) The tax was not to apply to sales or leases made by (a) the United States, any foreign government, any State, Territory or political subdivision thereof or the District of Columbia, and (b) any charitable or nonprofit corporation.

(3) The tax was not to apply to sales or leases of article taxable under Title VI (tax on beverages) or VII (tax on cigars, tobacco, etc.) or the then existing manufacturers' sales taxes in the Revenue Act of 1918 on automobile trucks and accessories (3 percent), other automobiles and motorcycles and accessories (5 percent), tires and tubes (5 percent), disk knives, daggers, etc. (10 percent), and yachts and pleasure boats (10 percent).

(d) OTHER PROVISIONS

(1) On and after July 1, 1921, taxes imposed by Sections 628 and 630 (soft drinks) and Title IX (excise taxes other than above specified) of the Revenue Act of 1918 were to be repealed

(2) With the approval of the Secretary, the tax imposed by this Act was not to apply in respect to articles sold or leased for export and in due course so exported.

2. ARGUMENTS FOR GENERAL SALES TAXATION

The arguments for a general sales tax fell into two broad categories: (a) the existing taxes were uneconomical and unjust in their burdens and (b) the general sales tax was the tax which could overcome the shortcomings of the existing taxes.

(a) ARGUMENTS BASED UPON A CRITICISM OF THE EXISTING TAXES

(1) Income and profits taxes discourage investment and hamper business.

(2) Such taxes are complicated in administration and collection.

(3) Selective excises discriminate between different types of commodities.

(4) Income and profits taxes increase the price level because of their uncertainty and expense of collection.

(5) Income and profits taxes burden unduly those with higher incomes.

(b) ARGUMENTS BASED UPON THE DESIRABILITY OF A GENERAL SALES TAX

(1) sales taxes are simple in assessment and collection.

(2) Sales taxes burden individuals on the basis of ability to pay, since they are measured by the amount spent.

(3) Such a tax is capable of producing a large stable revenue.

(4) It is low and uniform on all goods, wares and merchandise.

(5) This tax is simple in computation and eases compliance.

(6) Sales Taxes reduce the pyramiding of profits taxes and lower the price level.

(7) All industries and individuals would be treated alike and there would be no possibility of discrimination

(8) The low rate of sales taxes discourage the flight to tax-exempt securities.

(9) The low rate and the simplicity of a sales tax would stimulate business.

(10) A sales tax could be shifted by business to the consumer and the handicaps placed upon business by existing taxes would be removed.

3. ARGUMENTS AGAINST SALES TAXATION

The arguments of the opponents of a general sales tax fell into two categories: (a) a justification of income, profits and nonessentials taxation and (b) the impracticability of sales taxation.

(a) ARGUMENTS BASED UPON THE JUSTIFICATION OF THE EXISTING TAXES

(1) The income tax is based on ability to pay and is equitable.

(2) Income and profits taxes are not usually shifted.

(3) Selective excise taxes upon nonessentials represent as large a portion of revenue to be drawn from consumption taxes as is justifiable.

(4) Any inequities in the existing tax system could be eliminated without recourse to the elimination of the taxes themselves and the substitution therefor of a sales tax.

(b) ARGUMENTS BASED UPON THE IMPRACTICABILITY OF A SALES TAX

(1) A sales tax at uniform rates disregards ability to pay and is therefore inequitable.

(2) A sales tax is regressive and burdens the lower income groups unduly.

(3) Gross sales bear no normal relation to net profit and to the extent that the sales tax was not shifted would result in inequities as between different types of business.

(4) A sales tax would offer many difficulties of administration since it is untried.

(5) The burden of sales taxes upon business would create business instability.

(6) A sales tax makes a tax collector out of every seller.

(7) A sales tax discriminates in favor of integrated industries.

4. PROPONENTS OF GENERAL SALES TAXATION

In general, the proponents of a general sales tax were the representatives of business interests. Some of these were:

Roger W. Babson, Babson's Statistical Organization J. S. Bache, J. S. & Co., New York Chas. F. Bacon, Massachusetts Retail Merchants' Association Carlos B. Clark, National Retail Dry Goods Association Guy W. Cox, Boston Chamber of Commerce O. H. Kahn, Kuhn, Loeb and Company A. J. Kelly, National Association of Real Estate Boards C. B. Landredth,Business Science Clug of Philadelphia H. G. Opdycke, Tax League of America R. R. Reed, New York Board of Trade and Transportation of New York City M. Rothschild, Business Men's National Tax Committee H. Satterlee, Trade Council of the Manufacturers' Club, Philadelphia J. A. Schwarzman, National Industrial Conference Board

5. OPPONENTS OF GENERAL SALES TAXATION

In general the opponents of a general sales tax were the representatives of the Federal Government, farmer and labor groups, producers of raw materials,and marketing and industrial organizations. Some of those heard were.

T. S. Adams, U. S. Treasury Department T. C. Atkeson, National Grange J. Brayshaw, National Association of Retail Dealers W. M. Clark, representing the four train-service organizations R. G. Elliott, National Association of Credit Men F. R. Fairchild, Yale University P. H. Gadsden, American Electric Railway Association E. F. Goodwin, Chamber of Commerce of the United States R. B. Goodman, national Lumber Manufacturers Association W. W. Liggett, Committee of Manufacturers and Merchants of Chicago H. R. McKenzie, American Farm Bureau Federation E. F. McGrady, American Federation of Labor B. C. Marsh, People's Reconstruction League F. R. Plumb, National Industrial Conference Board E. R. Al. Seligman, Columbia University W. Starr, Farmer-Labor Party R. G. Wilson, American Mining Congress J. F. Zoller, National Conference of State Manufacturer's Associations

6. OTHER SALES TAX PROPOSALS

(a) ALTERNATIVE TYPES OF GENERAL SALES TAX PROPOSED BY MR. SMOOT

(1) BASE - Sale or lease price of all goods, wares or merchandise sold or leased.

(2) RATE AND EXEMPTIONS -- 3/4 percent -- 1-1/2 percent with a credit for taxes previously paid on goods bought for resale; or 1 percent -- 2 percent without distinction of integrated or unintegrated concerns but exempting each dealer on the first $50,000 or annual sales. (Congressional Record, Volume 61, Part 1, page 693).

(b) TRANSACTIONS TAX (MEYER S. ROTHSCHILD, BUSINESS MEN'S NATIONAL TAX COMMITTEE)

(1) BASE -- Sale or lease price of all commodities and services sold or leased.

(2) RATE AND EXEMPTIONS -- 1 percent maximum exempting annual sales or leases under $6,000.

(3) OTHER PROVISIONS -- Repeal of all taxes imposed on business, selective excises and high surtax rates on individuals. (Senate Hearings, 1921, page 194 et seq.: House Hearings, Revenue Revision, page 111 et seq.)

(c) SPENDINGS TAX (C.A. JORDAN, PUBLIC ACCOUNTANT)

(1) BASE -- Amounts spent during year.

(2) RATE AND EXEMPTIONS -- No rate specified. Exemptions include medical expenses, insurance premiums, amounts expended for investment, and personal exemption.

(3) OTHER PROVISIONS -- Repeal of income and profit taxes (Senate Hearings, 1921, page 487 et seq.)

(d) PURCHASE TAX (C. P. LANDRETH)

(1) BASE -- Money amount of transaction.

(2) RATE -- 1 percent of amount of transaction to be borne by vendee or lessee, but collected and remitted by vendor or lessor.

(3) OTHER PROVISIONS -- Repeal of income and profits taxes. (House Hearings, Internal Revenue Revision, 1921, page 103 et seq.)

(e) INCOME-SPENDINGS TAX (HON. OGDEN L. MILLS, REP. IN CONGRESS FROM NEW YORK)

(1) BASE -- Spendings tax -- Amount of expenditures not exempt for personal, living and family purposes of every citizen or resident of the United States made during the calendar year.

Income tax -- Amounts not exempt which are not spent.

(2) RATE Spending tax -- 1 percent of every $2,000 up to $18,000; thereafter, 1 percent for every $1,000 up to $50,000; and 40 percent on amounts over $50,000.

Income tax - 10 percent.

(3) EXEMPTIONS -- All ordinary expenses of business, trade or profession; taxes; gift for charitable or educational purposes; medical expenses; investments made during the year, including real estate; insurance premiums; $2,000 for single individual, $4,000 for head of family.

(4) OTHER PROVISIONS -- Repeal of individual surtax and corporate excess profits tax. (House Hearings, Internal Revenue Revision, 1921, page 144 et seq.)

(f) MANUFACTURERS' AND PRODUCERS' TAX (INT. BY MR. SMOOT, AUGUST 30, 1922, AS AMENDMENT TO H.R. 10874 PERTAINING TO VETERANS' ADJUSTED COMPENSATIONS)

(1) BASE -- Sale or lease price of all commodities manufactured or produced when sold or leased for consumption or use without further manufacture or process.

(2) RATE AND EXEMPTIONS -- 1/2 of 1 percent for the period November 1, 1922 -- November 1, 1925; thereafter, 1/4 of 1 percent exempting annual sales or leases under $6,000 and sales of refined gold and silver.

(3) OTHER PROVISIONS -- If any commodity is sold at less than fair market value obtainable the basis for tax shall be such fair market value. Tax shall not apply to (1) United States, any foreign government, any State, territory, or political subdivision thereof or the District of Columbia, (2) any hospital, (3) Army and Navy commissaries and canteens, (4) charitable and non-profit corporations, (5) any public utility, (6) any farmer as to the product of his farm. (Congressional Record, Volume 62, Part 12, page 11964.)

(g) TREASURY OPINION ON GENERAL SALES TAXES

Secretary's Annual Report, 1920, pages 28-29

"* * * in the Treasury's opinion, there are many grave objections to a sales tax. Further consideration of the subject has convinced me that a general sales or turnover tax is altogether in-expedient. It would apply not only to the absolute necessities of life -- the food and clothing of the very poor -- but it would similarly raise the prices of the materials and equipment used in agriculture and manufactures. It would confer, in effect, a substantial bounty upon large corporate combinations and place at corresponding disadvantage the smaller or disassociated industries which carry on separately the business operations that in many combinations and trusts are united under one ownership. The group of independent producers would pay several taxes, the combination only one tax. Finally, it would add a heavy administrative load to the bureau of Internal Revenue. * * * Consumption taxes, if used at all, should be laid upon other than absolute necessaries and restricted to a few articles of widespread use, so that the administration of the tax may be concentrated and made relatively simple."

Dr. T. S. Adams, House Hearings, Revenue Revision, 1921, page 22.

"He (the Secretary) says it would be unfortunate to replace any of these (existing) taxes with a general sales tax. If it becomes necessary to increase the consumption taxes, he thinks it is better to pick out a few productive, conveniently administered sales taxes."

Letter from Secretary Mellon, Senate Hearings, 1921, page 11.

"The Treasury is not prepared to recommend at this time any general sales tax, particularly if a general sales tax were designed to supersede the highly productive special sales taxes now in effect on many relatively nonessential articles."

(h) ACTION ON SALES TAX PROPOSALS

None of the proposals were enacted or recommended by the House Committee on Ways and Means or the Senate Finance committee. The amendment offered by Mr. Smoot for purposes of veterans' compensation was defeated without a record vote. (Congressional Record, Volume 62, Part 12, page 11967.)

NOTE

At Mr. Shere's request for a short statement on the legislative action on the proposed manufacturers' sales tax during the consideration of the Revenue Bill of 1932, the following is submitted:

On March 7, 1932, the Revenue Bill, including the manufacturers' sales tax, was introduced into the House of Acting Chairman Crisp of the Committee on Ways and Means (H.R. 10326). The sales tax provisions of the bill were as follows:

(a) BASE -- Sale price of every article sold for consumption or use by a licensed manufacturer or producer thereof in the United States and on the value of every article imported into the United States.

(b) RATE -- 2.25 percent (provision also included for annual license fee of $2,000 for manufacturers whose annual output is $2,000 or more).

(c) EXEMPTION -- Many articles were exempt, including farm products, feeds, necessary foodstuffs, various publications and religious articles and articles for export or for sale to any government unit.

The arguments pro and con, both in the Hearings and the debate on the floor of Congress were in much the same vein as the arguments enumerated in connection with the 1921 sales tax proposal. In addition, several new arguments were advanced:

ARGUMENTS FOR MANUFACTURERS' SALES TAX

(1) The tax would help balance the budget.

(2) the exemptions under the proposed tax would protect the farmer and consumer and facilitate administration.

(3) The tax is only an emergency measure and would constitute an interesting and desirable experiment.

ARGUMENTS AGAINST A MANUFACTURERS' SALES TAX

(1) That the tax would take from the States a field of taxation that ought to be reserved for them.

(2) That the tax would endanger the financial standing of municipalities by placing still heavier burdens on taxpayers and thus make it difficult for cities to maintain adequate revenues as a basis for borrowing.

(3) That it would retard the return of prosperity as the tax would raise the already high tariff wall by an additional 2.25 percent.

(4) The tax once adopted would not be withdrawn from the tax system after the end of the emergency.

(5) The tax would encourage the growth of trusts and combinations.

The House Committee had recommended the inclusion of this tax by a vote of 24 to 1. On March 24, 1932, when the final vote on the manufacturers' sales tax was taken in the House, numerous amendments were proposed in the House pertaining to the sales tax. To the exempt list were added sales of all foods, wearing apparel, agricultural implements and machinery, medicine, etc., but the opposition was too strong. The amendment offered by Mr. Doughton to strike the manufacturers' sales tax from the Revenue Bill was accepted and subsequent action incorporated into the bill a series of selective excise taxes.