1. Equity considerations are unfavorable:

(a) tax is ordinarily regressive with respect to income.

(b) not only fails to take account of personal obligations but actually strikes larger families having less margin for saving more severely.

(c) takes no account of the difference between earned and unearned incomes.

(d) places no unusual burden on windfalls or monopoly profits.

2. Any attempt to reduce the disadvantage indicated on grounds of equity by such devices as the taxation of services and rentals adds greatly to the administrative task.

3. The development of an administrative machine and a set of regulations is so extensive a task that it precludes the use of a general sales tax as a temporary expedient.

4. Once a tax like this has been set in operation and is producing large revenues, it will be very difficult to repeal. This is indicated by European experience during the 20's add 30's.

5. The strain on administration during the early years tends to prevent heavy rates and large collections.

6. The development of a system of rationing and price fixing will lead logically to the reduction in the sales tax base and at the same time will increase the difficulties of administration.

7. The tax offers no assistance in the transfer of resources to war time production unless differential rates are established. The letter would produce a sharp increase in the administrative load.

8. The tax eight very well serve as an excuse for wage increases since it has a tendency to raise the cost of living.

9. The "painlessness" of a tax of this sort as compared with a collection at source income tax is dubious.

10. The tax base cannot be kept simple without some sacrifice in the form of multiple taxation and pyramiding.

11. The tax base is pretty certain to be complex. Gross receipts is itself difficult to define and must be corrected substantially if a tax base having undesirable economic consequences is to be avoided.

12. The cost of collection plus payment is apt to be high.

13. The consequence of 12 is a demand for the reimbursement of the firms individual which in effect act as collecting agents.

14. The small unit presents an unusually difficult problem. The application of the tax to such units is difficult and their exemption is inexpedient from the point of view of equity as well as economic effects.

15. Although the yield is relatively predictable and elastic, similar virtues adhere to a broadly based collection at source tax on individual incomes.

16. Unless a special scheme such as the suggested coupon plan or the free distribution of an iron ration is installed it will be impossible to arrange adequate protection of the minimum standard of life without adding greatly to the complexity of administration.

17. The shift of the tax to the consumer is less certain than is commonly assumed. Hence the results are less predictable than in the case of a levy falling directly on personal net income.

18. When the tax fails to shift, discriminatory taxation of business enterprise results and the weight of the tax is apt to fall on smaller firms with unusual force. Haig and Shoup indicate these firms are less apt to shift the tax. The result is the introduction of a certain regressivity into the treatment accorded the various business enterprises which are in effect operating as collecting units under the tax.

19. While the tax does reach some of the income which is not taxed under a levy on personal income, it is unlikely that this is a desirable consequence if the income tax is applied to a broad base.

20. The enactment of a general sales tax does not really mean we are tapping a new source of income but rather that we are going at consumer income by a circuitous route. Why not tax incomes directly with a collection at source income tax?

Treasury Department, Division of Tax Research

February 12, 1942