Date 20 September 1934
Author Carl Shoup
Title The Federal Revenue System: Forward and Summary of Recommendations
Description A report to the Secretary of the Treasury.
Location Box 62; Tax Reform Programs and Studies; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.


A Report To The Secretary Of The Treasury

Members of the Staff

Roy C. Blakey
Malcolm H. Bryan
Reavis Cox
Louis Shere
Carl Shoup
Henry F. Walradt
Kossuth M. Williamson

Research Assistants

F. N. Campbell
Fred Koller
J. Wilner Sundelson




Recommendations in Which Members of the Staff Concur

Tax Policies Concerning

Personal Income Tax
Corporation Income Tax
Excess Profits Tax
Death Tax
Gift Tax
Liquor Tax
Tobacco Taxes
Manufacturers' Excise Tax
Automotive Taxes
Sales Tax
Processing Taxes
Custom Duties

Tax Revenues and Total Expenditures

Present Federal Debt
Justification of Increasing Debt by Borrowing
Effect of Borrowing on Present and Future Generations
Borrowing as Tax Technique
Borrowing as Banking Technique
Influence of Borrowing on "Tax Morale"
Additional Revenue from Taxation
Balancing the Budget

Use of the Tax System for Non-Fiscal Purposes

List of Recommendations Made by Each Member of the Staff

Automotive Taxes -- Malcomb H. Bryan
Customs Duties -- K. M. Williamson
Customs Duties on Tea, Coffee and Cocoa -- K. M. Williamson
Federal Estate and Gift Taxes -- Henry F. Walradt
Excess Profits and Capital Stock Taxes -- Malcomb H. Bryan
Federal Income Tax -- Roy G. Blakey
Individual Proprietorship, Partnership, and Corporation
(Differential Treatment under the Income Tax Laws);
Imputed Income; Miscellaneous Income Tax Matters -- Carl Shoup
Liquor Taxes -- K. M. Williamson
Manufacturers' Excise and Special Taxes -- Carl Shoup
Sales Tax -- Carl Shoup
Tobacco Taxes -- Reavis Cox


The present study, made at the request of the Secretary of the Treasury, was planned under the direction of Mr. Viner in the latter part of May and the first part of June 1934. For the most part, the staff was assembled in Washington June 20 and was disbanded about September 20. Preliminary reports of progress were handed to Mr. Viner on July 20, and by September 1 the finished memoranda, with a few exceptions, were distributed among the several staff members for mutual criticism. Amendments made in consequence of such criticism were incorporated in the final drafts handed to Mr. Viner on September 20 or shortly thereafter. To Mr. Shoup was assigned the task of formulating the general outline of the study and coordinating the work of the group, and he therefore wishes to acknowledge responsibility for the report with respect to these matters.

Chiefly, the report consists of a series of separate memoranda, one (in a few cases, more than one) person being solely responsible for what appears in any one memorandum. Each memorandum deals with one tax or a group of related taxes. This method of approach, necessary in order that important details with respect to each tax might not be overlooked, has the disadvantage of tending to produce a disjointed report. Therefore, a memorandum (Memorandum D/2), dealing with the tax system as a whole, has been drawn up to include such opinions as meet with the unanimous approval of the staff.

Finally, it should be noted that the entire report has been cast in terms of what is possible in the United States at the present time. Little attention has been devoted to changes in the fiscal system that one might desire but that obviously cannot be made until there occur other, more fundamental, legal and political changes, which give no indication of appearing in the near future. To this extent the report is concerned primarily with the present fiscal emergency. However, the long-run effects of the changes recommended have been given careful consideration, and it is hoped that most of the suggestions will be valid over a decade or more.

F. E. Campbell, Fred Koller, and J. Wilmer Sundelson participated in the study as research assistance to members of the staff. Acknowledgement should also be made of the valuable assistance freely rendered by governmental officials both within and without the Treasury.

Recommendations In Which Members Of The Staff Concur

The several memoranda submitted as parts of the present report each reflect the views of the writer thereof, and not necessarily the views of others of the group. It therefore seems advisable to present a separate statement concerning those tax policies with which all of the members of the staff are at this time willing to express their agreement.

The fact that certain details are not mentioned in this general statement does not necessarily mean that there is decided dissent among us on such matters. Most often it simply indicates that the members of the staff other than the one assigned to cover the point in question have not had an opportunity to study the matter thoroughly enough, and therefore do not desire to commit themselves thereon, especially as their part in the summer's work did not call for any such commitment. If necessary in policy formation, each of us doubtless would be willing to hazard at least a tentative answer to most of these questions of detail.

We find ourselves in substantial agreement on the use that should be made of the various taxing instruments available.

We believe that the personal income tax is not at the moment playing an unduly large role in the Federal tax system. Moreover, if additional revenue must be raised after the manufacturers' excise taxes and certain of the special taxes lapse within the next twelve months, /1/ we believe that the personal income tax is one of the two or three sources from which additional revenue should first be obtained. Any increase in revenue from this tax should be obtained by a combination of changes. One of these changes should be a lowering of the personal exemptions. There should also be an adjustment of the tax rate structure, care being taken, of course, to observe principles of equity as well as of fiscal necessity. In this connection we should not approve of any flat percentage increase. With respect to a lowering of the exemptions, it should be noted that this action would have the advantage, from our point of view, of increasing the number of direct taxpayers and thereby the number of persons having a conscious interest in government.

The corporation income tax is not, on the whole, so desirable a subject for increased revenues as is the personal income tax, because of its proportional rate and the possible repercussions of any change upon the relations between the two taxes. This latter remark reminds one, of course, that any proposal for any change in the personal tax, likewise, must take these relations into consideration. Whether the present relations between the two are satisfactory is a problem shot through with complex technical factors, which are discussed in the income tax memorandum.

Somewhat similar in form to the income taxes, but differing decidedly from them in its rationale, is the excess profits tax. As might be expected, opinions within our group differ considerably as to the justification for such a tax and, even if its justification is granted, as to its practicability. The word "excess" is difficult to define both in a philosophical approach to the problem and in the drafting of a law that is equitable in principle and administratively practicable. We believe that the evolution of a satisfactory excess profits tax law, if possible, will require further thought, study, and experimentation in practice. We must therefore, as a group, merely content ourselves within approving any policy that, after proper investigation, appears to offer a reasonable opportunity of taxing "excess" profits gained at the expense of general social well-being. With this we desire to couple a warning that the concept of taxable excess, simple as it may appear on the surface, is in fact extremely difficult to cast in concrete form. With these thoughts in mind, we recommend that the present excess profits tax, if retained, should be regarded as experimental,and exploratory of future possibilities, not as an immediate source of a substantial fraction of the Government's revenue requirements.

With respect to some form of death tax, we believe, not only that the Federal Government should continue to obtain the present amount of revenue from this source, but that this, like the income tax, is one of the first instruments that should be called upon if additional revenue is needed. The methods of obtaining such revenue should be much the same as those suggested above for the income tax. There seems little force to arguments that a death tax is inherently of a type that should be monopolized by either the States or the Federal Government, and until some well-integrated plan of State and Federal fiscal relations is developed we are inclined to favor retention of the present crediting device on substantially the present basis.

A gift tax is justified as a complement to a death tax, and, although we recognize that there are peculiar and difficult problems of administration involved in this tax, we believe it should be retained.

Liquor taxation is, at least with respect to spirits, intimately bound up with the problem of illicit traffic in liquor. The extent to which this problem should be allowed to influence tax rates is obviously a matter upon which only the special student of the subject is qualified to pass an opinion, but as a group we agree that any decided lowering of the present spirits rate must rest for justification upon the possibility of checking the illegal traffic. We concur fully in the difficulties of judgment pointed out in the memorandum on liquor taxes. In general, for non-fiscal reasons, we approve of the system of taxing spirits at higher rates than beer or wine.

The tobacco taxes as a group should not be considered in the front rank if an appeal for additional revenue must be made, although they can supply more money if necessary. The tax rates differ widely among the several tobacco products, cigarettes bearing especially high rates. These disparities should probably be eliminated, and in any case it seems clear that, if tobacco taxes are to be raised, the cigarette tax should be raised last, and, if they are to be lowered, it should be lowered first. All of the tobacco taxes except those on cigars are levied at specific rates, and, to make them more responsive to changes in price levels, as well as more equitable, it is recommended that all the rates should be graduated on the basis of intended retail price, somewhat as is now done with cigars. Finally, it may be noted that none of the plans that have recently received public notice seems to offer a desirable method of adjusting Federal and State taxation of tobacco, considered as an isolated matter.

The manufacturers' excise taxes, the so-called "special" taxes on checks, admissions, etc., and the various stamp taxes (e.g. security issuance and transfer) form a heterogeneous group of levies, some of which are quite suitable as emergency taxes, but on the whole they do not form a desirable part of a fiscal system in normal times, and each of us can select from the list some that we believe should not be levied at the present time, or even if a moderate amount of additional revenue is needed.

Six of these taxes however (those levied on automobiles, trucks, parts and accessories, tires and tubes, lubricating oil, and gasoline) deserve special mention. As "user" taxes to finance the Federal highway program they are, in differing degrees and at certain rates, justifiable. As luxury taxes, on the other hand, they are not very satisfactory, at least in their present form. The gasoline tax seems to offer a special problem in that there is a strong demand that the Federal Government leave this field entirely to the States, or act merely as a collecting and distributing agency for them. We cannot agree to these programs, and believe that the Federal Government should, at least for the present, retain for itself some part of gasoline tax revenues, gauging its revenue from automotive taxes to equal, approximately, Federal appropriations for automotive benefits. As general purpose levies the automotive taxes have no strong appeal to us.

The sales tax, in the form of either a manufacturers' sales tax with or without exemption of food and/or clothing, or a "general turnover" tax on all sales, is in our opinion one of the least desirable of all forms of taxation, although, if a sales tax must be levied, a manufacturers' tax is to be preferred to one on all sales unless the amount of revenue to be raised is very great. When consideration is taken of the distribution of the present total tax load, we disapprove of the manner in which the sale tax distributes the tax burden, insofar as it is shifted. We also fear the inequitable distribution of burden among firms of different sizes and lines of business that would result if, as is possible, a considerable part of the tax was not shifted. Moreover, as another major attempt to impose "painless" or hidden taxation, it has the important disadvantage of imposing no barrier to wasteful expenditure.

We have devoted relatively little time to a study of the processing taxes and the customs duties. The former are presumably temporary taxes, still in a state of flux because of broad powers granted to the executive to alter tax rates and the list of commodities taxed; the latter are also in a process of transition through trade bargaining. However, we know enough about both of them to express our disapproval. With respect to the processing taxes, we are opposed to special taxation of necessities of life such as food and clothing, whether the tax is in fact shifted forward to consumers (among whom are millions on the relief rolls) or backward to the farmers (whose benefit payments are in this case financed in part by money from their own pockets). Whether benefit payments should be made to farmers is a question outside the scope of our inquiry; we are here speaking of the processing taxes as taxes. The attitude of economists generally on protective tariffs is well known, and we share in the view that the country as a whole should in the long run be more prosperous if tariffs were used only for revenue purposes, although any change should not, as might easily be the case, err on the side of abruptness. In view of the many other tax problems, however, that will be the subject of more heated debate in the coming months, little time was allotted to customs in the detailed studies, and the memorandum on this subject is restricted to answering a few specific questions concerning the purely fiscal aspects of certain imports.

None of the remarks above should be taken to imply that we should oppose the imposition of the taxes that we regard as undesirable, if, owing to political considerations, these taxes offered the only alternative to a policy of what we should consider to be excessive borrowing or undue contraction of essential expenditures. The point is that we believe it to be economically and administratively feasible to avoid excessive borrowing or undue economy without resorting to such taxes.

The problem of the fiscal relations of the Federal, State, and local Governments has no ready solution to which any of us can subscribe. As indicated above, certain conclusions with respect to particular taxes may be reached for temporary purposes, but a satisfactory long-term solution will depend upon a comprehensive program integrating the entire tax system.

The points discussed above are also covered in the several memoranda, There are some other topics, concerning the tax system in general rather than any specific tax, that can only be noted briefly.

Tax Revenues And Total Expenditures. /2/ -- The present wide gap between tax revenues and total disbursements poses the problem of whether the next Congress should take energetic measures to assure that part or all of the gap be eliminated for the fiscal year 1935-36 and thereafter. It is difficult to speak of this matter without reference to specific levels of debt, expenditures, and tax revenues, yet the present discussion must omit such items, largely because our survey has been cast in more narrow and detailed terms of the several taxes and time has therefore not permitted a thorough study of the budgetary problem. We are, however, agreed on the following statements of general policy, some of which might seem so elementary as to be not worth mentioning were it not for the fact that they are apt to be neglected under the pressure of emergency such as the present.

1. The situation calls for more than merely drifting with the tide of expenditure on the assumption that no grave problems would be presented by a large increase in the present Federal debt.

2. Further marked increase in the debt can be Justified only if it promises to result in a level of business activity materially higher than would occur if revenues were raised by taxation instead of borrowing. This does not imply that relief or other needs should not be cared for; indeed, it does not touch the problem of expenditures, but bears merely on the manner of meeting the expenditures.

3. Domestic borrowing by the government distributes the burden between the present generation and future generations in a degree and manner very difficult to ascertain, as is indicated when one attempts to trace all the indirect effects of a borrowing policy. Such an analysis, moreover, is impossible to carry through except in general terms. True, the borrowing may result in no long-run burden for the present generation if it aids business recovery in the manner indicated above. If it does not, however, it is than likely to become an instrument of hidden taxation whereby government disbursements are made largely at the expense of those persons adversely affected on balance by the consequent rise in prices.

4. Viewed narrowly as a matter of tax technique, hidden taxation of this type is the worst kind of tax. The approximate distribution of its burden among specific groups in the community is not so predictable as that of ordinary taxes; so far as it can be predicted, one may say that it can load, with disquieting swiftness, to a distribution of burden that we should agree would be unjust even when account is taken of the injustices caused by the deflation of 1929-1933; and, perhaps worst of all, those who are burdened are not apt to realise the source of their troubles until it is too late for them to take effective action to present their case.

5. Viewed as a matter of banking technique, the problem posed by further borrowing is outside the immediate scope of our study, but even as students of taxation we necessarily note that a policy of excessive delay in covering expenditures by taxation inevitably affects the banking structure, introducing a factor that must be carefully considered in any final, well-rounded view of the problem.

6. An abstention for long periods from the use of taxation to cover all expenditures necessarily weakens what may be called "tax morale". The willingness consciously to impose a tax burden upon oneself declines, and the ultimate restoration of governmental finances to a normal basis becomes correspondingly more difficult. Where the danger line lies in this matter -- whether we are near it now or not -- must remain a matter of individual judgment, but we believe that borrowing has been carried far enough to warrant serious consideration of this aspect of the financial problem.

7. There is substantial agreement among us that the Federal Government should within the near future raise additional revenue from taxation, particularly to supply funds to meet the service of the increasing debt (although this letter point is not to be taken as a formula having any special validity regardless of other conditions affecting the budgetary problem). For reasons noted above, we do not care, in this memorandum, to express our opinions in terms of specific figures. However, as may be gathered from the contents of this memorandum, we are keenly aware of the dangers that may result from a long-continued policy of heavy borrowing.

8. It will be noted that most of the points above have dealt with the possible dangers, from the point of view of taxation, inherent in a policy of extensive borrowing. This does not imply a commitment on the part of the group as to the time at which the budget should be balanced. Comment has been east in the terms noted above because we feel that in this way our opinions can be of most use, since a borrowing policy has been in effect for a considerable period and the time has come for a frank consideration of these dangers.

Use Of Tax System For Non-Fiscal Purposes. -- Since the spirit of the times appears to call for a considerable amount of Government regulation and support of activities hitherto left largely to the play of private forces, it is pertinent to inquire into the extent to which the tax system can be made an instrument of this policy. "Non-fiscal" uses of the Federal tax system have long been common; witness the customs duties, and the taxes on theatre-ticket speculators, state bank notes, cotton futures, oleomargarine, filled cheese, mixed flour, and narcotics. A strong non-fiscal element is apparent in the weighting of the liquor taxes against spirits.

Recently, however, talk of more ambitious attempts to use the Federal revenue system as a regulatory mechanism has been heard. The tax system, so the argument runs, may be employed to eliminate business cycles or at least to lessen their severity, by penalizing "over-saving" and encouraging consumption, by checking speculation, by favoring certain geographical or social classes at the enzymse of others, by encouraging business initiative, by discouraging "unwise" business expansion, and so on. Finally, there is always the plea for "redistribution of wealth" through the tax system.

To use of taxes for other than revenue purposes is not necessarily an evil, but in all such cases great care should be taken to consider all possible effects, some of which may be undesirable and contrary to the ultimate goal originally contemplated. With respect to the more ambitious attempts, such as those noted above, we think further study in necessary and we wish to point out some of the difficulties. We believe that at present not enough is known about the economic mechanism to warrant a conclusion as to whether, if saving is checked, certain advantages with respect to the business cycle will or will not follow. Then there is always the troublesome problem of degree, and here even the primary effect of certain tax changes cannot be predicted. To illustrate: a discriminatory tax of, say, 25 percent on all income from savings would perhaps result in smaller savings than would have occurred without the tax, but how much smaller, if any, or what the effect would be on the business cycle, we cannot say.

With respect to redistribution of wealth through the tax system, it should be noted that every tax system accomplishes this in one way or another. Probably the only kind of system that would not do so would be one whereby the taxpayer received in exchange for his payment some specific, measurable benefit worth exactly what he was taxed. "Redistribution" is often taken to mean such action as would actually increase the transfer of wealth from the rich to the poor through the machinery of taxation and expenditures. However the word may be defined, we feel no need to attempt in this paragraph a definite answer to the question that it raises; for, insofar as the problem is one of taxation, our recommendations respecting the several taxes may speak for themselves, and, insofar as it is one of extent and nature of expenditures, the topic lies outside the scope of our present study.

Some of the factors noted above inevitably influence our decisions on the relative desirability of certain taxes. They do not, however, predominate. It should also be noted that all taxes have non-fiscal aspects, in the sense that they do, in some manner, influence economic and social conditions. The emphasis in the discussion above, however, has been on the problems of consciously using a tax system as an instrument for certain well-defined non-fiscal goals.

In summary, there is a heavy burden of proof to be borne by those who would attempt to use the tax system to influence decidedly the major economic currents of the country, but we grant that taxation can be very helpful with respect to certain more narrowly restricted regulatory activities. For the rest, the system should be so constructed that it does not discriminate markedly against any given types of economic activity not clearly undesirable from the social point of view.

Roy G. Blakey

Louis Shere

Malcolm H. Byran

Carl Shoup

Reavis Cox

Henry F. Walradt

Kossuth M. Williamson

Note: This memorandum was drafted by the seven members of the staff. Inasmuch as the names of the research assistants also appear in connection with the summer's work in general, it should be noted that they are not to be held in any way responsible for the ideas expressed either in this memorandum or in the individual memoranda. The staff wishes, nevertheless, to express its appreciation of their aid in the investigations.

Memorandum D

List of Recommendations Made by Each Member of the Staff

The recommendations listed in each of the several memoranda are here grouped together. These recommendations in each case represent the conclusions of the writer of the memorandum concerned, and do not necessarily reflect the views of the members of the staff, since time has not permitted a thorough study by each member, of all the topics covered. Finally, these recommendations must not be judged apart from the supporting data in the memoranda, lost misinterpretation arise. For the general points upon which the staff members desire to record their unanimous agreement, the reader is referred to Memorandum C.


These recommendations with respect to the Automobile Taxes are made by Mr. Malcolm H. Byran. --


1. That the Federal Government should not use automotive revenues for general purposes.

2. That the Federal Government should gauge its automotive taxes to equal, approximately, its expenditure on highways.

a. Federal expenditure on roads contribute special benefits to automotive users.

b. There is some reason for levying on the automobile user, however, something less than the entire amount expended on highways:

(1) An indeterminable fraction of the benefits arising from highway outlays accrue to persons other than highway users. Some expenses are presumably incurred for military and postal purposes.

(2) Certain expenditures for roads in public parks and reservations, while doubtless yielding important benefits to particular automobile users, could probably be, at least in part, more appropriately financed by the use of tolls or some other device for closer assessment of the costs upon the actual beneficiaries.

3. That the Federal Government should not endeavor to recoup from the automobile user emergency expenditures on highways for unemployment relief.

a. To the extent that these are loans to the States, they are the proper charge against State revenues, not Federal.

b. To the extent that they are outright grants to the States, recovery from the automobile users would involve serious inconsistency, since very genuine incidental benefits from reemployment efforts on other public works are being accorded to property owners and others against whom no effort to assess a payment for the benefits is being made.

4. That the expenditure program for highway purposes should be given close reexamination.

a. The taxation of automobile users on the theory of special benefits necessitates close attention to the actual delivery of the benefits presumed. The circumstances that the special expenditures for highways, moreover, can be covered by special taxation of automobile users is not substantial evidence as to the economic desirability of the expenditure.


1. That attention should be given to the inclusion, at a proper relative rate, of fuel for Diesel engines -- now coming into more widespread use in the motor transportation field.

2. That a tax on automotive truck tractors designed for highway use and tax on trailers should be added to the vehicle schedule.

3. That the rate on trucks should be graduated in accordance with a weight and/or capacity formula in order to care for the factor of ton-mile road use and road damage not satisfactorily assessed by a motor fuel tax.

4. That the application of a slightly graduated rate on passenger cars to assess the luxury element of higher priced vehicles should be further considered.

a. If adopted, a luxury graduation should be moderate, and applied by narrow brackets (not to the entire sale value) in order to disturb as slightly as possible the price structure of the automobile industry.

5. That the levy of taxes designed to assess automobiles should be as closely confined to the user as is administratively practicable.

a. There seems no reason for levying a special excise on lubricating oil used in nonautomotive equipment, such as industrial machinery, mine machinery, railroad journal boxes, and so forth. Moreover, the tax is comparatively excessive on the cheaper grades of oil employed in many nonautomotive connections.

b. It hardly seems appropriate under an automobile tax, presumably related to highway benefits, to tax tires on ambulance cots, toys, and so on.

These recommendations with respect to the Customs Duties, are made by Mr. K. M. Williamson.

Though the prospects of the general adoption of a revenue tariff may not be bright at the present time, it may be well to state the rules which should be followed if and when such a tariff is adopted. These rules may be briefly stated as follows:

(1) A few articles of wide consumption should be selected rather than a large and indiscriminate list. The fewer the articles, the simpler and less costly the administration. The number of articles should, however, not be made too few, because of the tendency increase of rates to produce proportionately less revenue as the points of diminishing returns are reached.

(2) Articles selected should be relatively inelastic in demand, so that revenue will not be curtailed by restriction of consumption.

(3) Articles chosen should so far as possible not have too great value in small bulk lest smuggling be encouraged.

(4) The articles chosen should as far as possible not be domestically supplied, lest demand be shifted from imported to domestic goods, with loss of revenue. This result can, however, be avoided as was done for certain articles in England, by imposing upon domestic articles excise taxes equivalent to customs duties upon the similar imported articles. /3/

Additional principles which should be considered in the construction of a tariff for revenue only are:

(1) That no duty should be imposed at a rate higher than that which will yield the maximum amount of revenue, and

(2) That in order to provide a revenue sensitive to rising prices ad valorem duties should be preferred to specific duties.

A brief examination of the present free list indicates that considerable revenue may be obtained from making certain of the articles of that list dutiable, should that policy appear advisable. Tea, coffee, and unprepared cocoa, now on the free list, are treated in Memorandum K. Time does not permit a full examination of all the other articles on the free list but a few items will serve to illustrate the revenue possibilities of applying duties to free list articles at this time. Take bananas for example. During the calendar year 1933, we imported 39.6 millions of bunches of this fruit. A duty of 50 cents a bunch if it did not seriously curtail consumption would yield perhaps $16,000,000. Rubber is another article not produced domestically. In the same year we imported 963,656,038 pounds of this article. A duty of one cent a pound would probably yield approximately $9,000,000. If the fiscal emergency requires it, a further study of the free list articles might be made to determine which seem most desirable for the application of duty. /4/

These recommendations with respect to the Customs Duties on Tea, Coffee, and Cocoa, are made by Mr. K. M. Williamson.

(1) The writer recommends that, on grounds of equity, duties be not imposed upon tea, coffee and cocoa beans. These duties, like other taxes which rest upon widely consumed commodities, are very regressive in their burden, bearing proportionately more heavily upon the poor than upon the well-to-do. In view of the apparent distribution of the burden of the present tax system such additions of taxes upon the "breakfast table," would, in the writer's opinion, be a violation of tax equity.

(2) The writer, therefore, recommends that, in the search for new sources of revenue to meet the present fiscal emergency, the revenue possibilities of direct taxes and of other taxes shown to be equitable by other memoranda be exhausted before resort to duties upon tea, coffee and cocoa beans.

(3) If, however, it becomes imperative to introduce into our tax structure more sources which are dependable in depression and at the same time quite responsive to price changes, the writer agrees that duties upon these articles of relatively inelastic demand should be in the forefront of consideration.

These recommendations with respect to The Federal Estate and Gift Taxes, are made by Mr. Henry F. Walradt.

A. Recommendations.

1. The Federal Government should retain the basic estate tax of 1926 with certain amendments as a part of its permanent taxation system.

2. The Federal Government should continue to impose an additional estate tax along the general lines of that provided by the Revenue Act of 1932, as amended by the Revenue Act of 1934, until its great fiscal needs resulting from the depression have materially decreased.

3. The Federal Government should not substitute an inheritance tax for its present estate taxes. Inheritance or succession taxes should be left for the exclusive use of the States. For recommendations relative to certain features of an inheritance tax, should Congress deem such a tax desirable see Recommendation 18.

4. The present exemptions of $100,000 in the case of the basic estate tax and of $50,000 in the case of the additional estate tax should be lowered.

5. The exemptions for the basic estate tax and the additional estate tax should be identical.

6. Instead of stating some specific exemption which is the same for all estates, the exemption should depend upon the number and the relationship of the heirs or beneficiaries. The following exemptions are suggested in lieu of those provided in Section 303 (4) of the Revenue Act of 1926 and Section 401 (c) of the Revenue Act of 1934.

     (a) Such part of the estate as goes              up to $15,000
         to the widow

     (b) Such part of the estate as goes              up to $15,000
         to an adult child 21 years of age
         and over who is physically or
         mentally incapacitated from earning
         a living, (included in this group
         should be minor children who because
         of physical or mental infirmities
         will, when they become of age, be
         classed among those "incapacitated
         from earning a living".)

     (c) Such part of the estate as goes               up to $7,500
         to the husband

     (d) Such part of the estate as goes               up to $5,000
         to a lineal ancestor.

     (e) Minor children (excepting those
         falling in (b)) should be graduated
         according to age, the amount of
         exemption being determined by the
         number of years they must live to
         become 21. The following scale is

               $300 per year allowed for              $1,500 - $300
               children from 16 years to
               20 years of age, inclusive

               $200 per year additional             $2,300 - $1,700
               allowed for children from
               12 years to 15 years of
               age, inclusive.

               $10 per year additional              $3,500 - $2,400
               allowed for children from
               birth until 11 years of
               age inclusive.

7. There should be a proviso that in no case shall the total personal exemptions be in excess of $50,000.

8. The exemptions should be taken from the lowest brackets of the taxable estate rather than from the highest brackets as is the result of the present procedure.

9. The present exemption of $40,000 for insurance to specified beneficiaries should be repealed. To accomplish this the last half of Section 302 (g) of the Revenue Act of 1926 should be amended to read as follows: "and to the extent of the amount receivable by the executor and by all other beneficiaries as insurance under policies taken out by the decedent upon his own life."

10. The Bureau of Internal Revenue might attempt to tax the proceeds from insurance policies taken out by a decedent upon his own life in favor of specified beneficiaries, and over which he had retained none of the legal incidents of ownership.

11. Instead of permitting the deduction from the gross estate of the full amount of the value of any property or its equivalent upon which the Federal estate tax or Federal gift tax had been imposed within five years prior to the death of the deceased (see paragraph (2) of subdivision (a) and paragraph (b) of the Revenue Act of 1926 as amended), it is suggested that the amount of such property deductible be as follows:

90 per cent of the full amount of the value of such property when the event giving rise to the tax occurred within one year of the decedent's death.

75 per cent of the full amount of the value of such property when the event giving rise to the tax occurred within two years of the decedent's death.

60 per cent of the full amount of the value of such property when the event giving rise to the tax occurred within three years of the decedent's death.

40 per cent of the full amount of the value of such property when the event giving rise to the tax occurred within four years of the decedent's death.

20 per cent of the full amount of the value of such property when the event giving rise to the tax occurred within five years of the decedent's death.

12. Section 301 (a) of the Revenue Act of 1926, which provides for the rates of the basic estate tax, should be amended to read as follows:

"Section 301 (a) In lieu of the tax imposed by Title III of the Revenue Act of 1926, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in Section 303 as amended /5/) is hereby imposed upon the transfer of the net estate of every decedent dying after the enactment of this act, whether a resident of nonresident of the United States; 1 per centum of the amount by which the net estate exceeds the personal exemptions provided in Section 303 (c) /6/ and does not exceed $50,000;

"2 per centum of the amount by which the net estate exceeds $50,000 and does not exceed $100,000;

"3 per centum of the amount by which the net estate exceeds $100,000 and does not exceed $200,000;

"4 per centum of the amount by which the net estate exceeds $200,000 and does not exceed $400,000;

"5 per centum of the amount by which the net estate exceeds $400,000 and does not exceed $500,000;

"6 per centum of the amount by which the net estate exceeds $500,000 and does not exceed $600,000;

"7 per centum of the amount by which the net estate exceeds $600,000 and does not exceed $700,000;

"8 per centum of the amount by which the net estate exceeds $700,000 and does not exceed $800,000;

"9 per centum of the amount by which the net estate exceeds $800,000,000 and does not exceed $1,000,000;

"10 per centum of the amount by which the net estate exceeds $1,000,000 and does not exceed $1,200,000;

"11 per centum of the amount by which the net estate exceeds $1,200,000 and does not exceed $1,400,000;

"12 per centum of the amount by which the net estate exceeds $1,400,000 and does not exceed $1,600,000;

"13 per centum of the amount by which the net estate exceeds $1,600,000 and does not exceed $2,000,000;

"14 per centum of the amount by which the net estate exceeds $2,000,000 and does not exceed $2,500,000;

"15 per centum of the amount by which the net estate exceeds $2,500,000 and does not exceed $3,000,000;

"16 per centum of the amount by which the net estate exceeds $3,000,000 and does not exceed $3,500,000;

"17 per centum of the amount by which the net estate exceeds $3,500,000 and does not exceed $4,000,000;

"18 per centum of the amount by which the net estate exceeds $4,000,000 and does not exceed $4,500,000;

"19 per centum of the amount by which the net estate exceeds $4,500,000 and does not exceed $5,000,000;

"20 per centum of the amount by which the net estate exceeds $5,000,000 and does not exceed $6,000,000;

"21 per centum of the amount by which the net estate exceeds $6,000,000 and does not exceed $7,000,000;

"22 per centum of the amount by which the net estate exceeds $7,000,000 and does not exceed $8,000,000;

"23 per centum of the amount by which the net estate exceeds $8,000,000 and does not exceed $9,000,000;

"24 per centum of the amount by which the net estate exceeds $9,000,000 and does not exceed $10,000,000;

"25 per centum of the amount by which the net estate exceeds $10,000,000."

13. Section 405 of the Revenue Act of 1934, which provides for the rates of the tentative tax used in computing the additional estate tax should he amended to read as follows: "(a) Section 401 (b) of the Revenue Act of 1932 is amended to read as follows:

'(b) The tentative tax referred to in subsection (a) (1) of this section shall equal the sum of the following percentages of the value of the net estates:

'2 per centum of the amount by which the net estate /6/ exceeds the personal exemptions provided in section and does not exceed $20,000;

'3 per centum of the amount by which the net estate exceeds the aforesaid personal exemptions or $20,000, whichever is greater, and does not exceed $30,000:

'4 per centum of the amount by which the net estate exceeds the aforesaid personal exemptions or $30,000, whichever is greater, and does not exceed $40,000;