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'5 per centum of the amount by which the net estate exceeds the aforesaid personal exemptions or $40,000, whichever is greater, and does not exceed $50,000;

'6 per centum of the amount by which the net estate exceeds $50,000 and does not exceed $60,000;

'8 per centum of the amount by which the net estate exceeds $60,000 and does not exceed $80,000;

'10 per centum of the amount by which the net estate exceeds $80,000 and does not exceed $100,000;

'12 per centum of the amount by which the net estate exceeds $100,000 and does not exceed $150,000;

'14 per centum of the amount by which the net estate exceeds $150,000 and does not exceed $200,000;

'16 per centum of the amount by which the net estate exceeds $200,000 and does not exceed $250,000;

'18 per centum of the amount by which the net estate exceeds $250,000 and does not exceed $300,000;

'20 per centum of the amount by which the net estate exceeds $300,000 and does not exceed $400,000;

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

'25 per centum of the amount by which the net estate exceeds $500,000 and does not exceed $800,000;

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

'31 per centum of the amount by which the net estate exceeds $1,000,000 and does not exceed $1,300,000;

'34 per centum of the amount by which the net estate exceeds $1,300,000 and does not exceed $1,600,000;

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

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

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

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

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

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

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

'56 per centum of the amount by which the net estate exceeds $5,500,000 and does not exceed $6,500,000;

'58 per centum of the amount by which the net estate exceeds $6,500,000 and does not exceed $7,500,000;

'60 per centum of the amount by which the not estate exceeds $7,500,000.'"

14. Credit for State inheritance and estate taxes should continue to be granted only in connection with the basic estate tax.

15. This credit, which is set at 80 per centum by Section 301 (b) of the Revenue Act of 1926, should be increased to 85 per centum or possibly 90 per cent.

16. The Federal estate law should be amended so as to include expressly the value of community property in the estate of the deceased husband. Undoubtedly the constitutionality of such an amendment would be questioned and the Supreme Court would pass judgment on this question. Possibly this action should be deferred until proposed methods of dealing with thin problem in connection with the Federal income tax have been worked out and their constitutionality determined.

17. If any change in made in the present provision that the value of gross estate of a decedent shall be, for the purpose of computing the Federal estate taxes, the value at the date of the decedent's death, it is suggested that the value of the estate to be used for computing these taxes be found by adding the value of the net taxable estate at the time of the decedent's death to the value of this estate one year later and dividing this sum by two.

18. Should it seem desirable to substitute an inheritance tax for the present Federal estate taxes, (a) the proposals that are made relative to exemptions, the treatment of the proceeds from life insurance policies, allowance for prior taxed property, etc., in connection with the Federal estate taxes, are repeated: (b) The rates should be progressive based solely on the size of the individual bequest; (c) The effective rates should be considerably higher than the present effective rates of the Federal estate taxes; (d) The tax should be divided into two parts; (1) a basic tax against which an 85 per cent credit should be allowed for State death taxes paid to be a permanent part of the Federal system of taxation, and (2) an additional tax to be repealed as soon as the financial condition of the Federal Government justifies a reduction in tax revenues.

19. A provision that all securities must be registered would aid in preventing evasion of the gift and estate taxes.

20. The gift tax and the estate tax should be more closely coordinated and ultimately, if not in the near future, should be combined into one tax.

21. Section 504 (b) of the Revenue Act of 1932, which provides that the first $5,000 of gifts made by a donor to any parson during the calendar year shall not be subject to the gift tax, should be amended to read: "Gifts Less Than $2,500. -- 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 $2,500 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".

22. Section 505 (a) (1) of the Revenue Act of 1933 should be amended to reduce the specific exemption from $50,000 to $30,000 and should read as follows: "Specific Exemption. -- An exemption of $30,000, less the aggregate of the amounts claimed and allowed as specific exemptions for preceding calendar years".

23. The rates of the gift tax should be increased so as to be identical with the rates of the tentative estate tax. Assuming the present rates of the latter to be amended as suggested above in point 13, Section 520 (a) of the Revenue Act of 1934 be amended so as to read:

"(a) The gift-tax schedule set forth in section 520 of Revenue Act of 1934 is amended to read as follows:

'Upon net gifts not in excess of $20,000, 2 per centum.

'$400 upon net gifts of $20,000; and upon net gifts in excess of $20,000 and not in excess of $30,000, 3 per centum in addition of such excess.

'$700 upon net gifts of $30,000; and upon net gifts in excess of $30,000 and not in excess of $40,000, 4 per centum in addition of such excess.

'$1,100 upon net gifts of $40,000; and upon net gifts in excess of $40,000 and not in excess of $50,000, 5 per centum in addition of such excess.

'$1,600 upon net gifts of $50,000; and upon net gifts in excess of $50,000 and not in excess of $60,000, 6 per centum in addition of such excess.

'$2,200 upon net gifts of $60,000; and upon net gifts in excess of $60,000 and not in excess of $80,000, 8 per centum in addition of such excess.

'$3,800 upon net gifts of $80,000; and upon net gifts in excess of $80,000 and not in excess of $100,000, 10 per centum in addition of such excess.

'$5,800 upon net gifts of $100,000; and upon net gifts in excess of $100,000 and not in excess of $150,000, 12 per centum in addition of such excess.

'$11,800 upon net gifts of $150,000; and upon net gifts in excess of $150,000 and not in excess of $200,000, 14 per centum in addition of such excess.

'$18,800 upon net gifts of $200,000; and upon net gifts in excess of $200,000 and not in excess of $250,000, 16 per centum in addition of such excess.

'$26,800 upon net gifts of $250,000; and upon net gifts in excess of $250,000 and not in excess of $300,000, 18 per centum in addition of such excess.

'$35,800 upon net gifts of $300,000; and upon net gifts in excess of $300,000 and not in excess of $400,000, 20 per centum in addition of such excess.

'$55,800 upon not gifts of $400,000; and upon net gifts in excess of $400,000 and not in excess of $500,000, 22 per centum in addition of such excess.

'$77,800 upon net gifts of $500,000; and upon net gifts in excess of $500,000 and not in excess of $800,000, 25 per centum in addition of such excess.

'$152,800 upon net gifts of $800,000; and upon net gifts in excess of $800,000 and not in excess of $1,000,000, 28 per centum in addition of such excess.

'$208,800 upon met gifts of $1,000,000; and upon net gifts in excess of $1,000,000 and not in excess of $1,300,000, 31 per centum in addition of such excess.

'$301,800 upon net gifts of $1,300,000; and upon net gifts in excess of $1,300,000 and not in excess of $1,600,000, 34 per centum in addition of such excess.

'$403,800 upon net gifts of $1,600,000; and upon net gifts in excess of $1,600,000 and not in excess of $2,000,000, 37 per centum in addition of such excess.

'$551,800 upon net gifts of $2,000,000; and upon net gifts in excess of $2,000,000 and not in excess of $2,500,000, 40 per centum in addition of such excess.

'$751,800 upon net gifts of $2,500,000; and upon net gifts in excess of $2,500,000 and not in excess of $3,000,000, 43 per centum in addition of such excess.

'$966,800 upon net gifts of $3,000,000; and upon net gifts in excess of $3,000,000 and not in excess of $3,500,000, 46 per centum in addition of such excess.

'$1,196,800 upon net gifts of $3,500,000; and upon net gifts in excess of $3,500,000 and not in excess of $4,000,000, 49 per centum in addition of such excess.

'$1,441,800 upon net gifts of $4,000,000; and upon net gifts in excess of $4,000,000 and not in excess of $4,500,000, 52 per centum in addition of such excess.

'$1,701,800 upon net gifts of $4,500,000; and upon net gifts in excess of $4,500,000 and not in excess of $5,500,000, 54 per centum in addition of such excess.

'$2,241,800 upon net gifts of $5,500,000; and upon net gifts in excess of $5,500,000 and not in excess of $6,500,000, 56 per centum in addition of such excess.

'$2,801,800 upon net gifts of $6,500,000; and upon net gifts in excess of $6,500,000 and not in excess of $7,500,000, 58 per centum in addition of such excess.

'$3,381,000 upon net gifts of $7,500,000; and upon net gifts in excess of $7,500,000, 60 per centum in addition of such excess.'"

24. In Connection with the gift as well as the estate taxes (see Recommendation 16) provision should ultimately be made for subjecting to taxation the transfer of the management and control of community property. However, it may be well to await the results of attempts to solve the problem of community property income in connection with the Federal income tax before taking any action in this matter.

These recommendation with respect to the Excess Profits and Capital Stock Taxes, are made by Mr. Malcolm H. Bryan.

General

1. That the present excess profits tax, in conjunction with a capital stock tax, should be maintained for the time being.

a. The current enactment's method of initiating an excess profits tax by means of taxpayers' declarations, as restrained by the flat-rate capital stock tax, in an interesting departure in excess profits taxation, and while open to many objections, has a great deal to be said in its favor from an administrative standpoint and, from the standpoint of equity, does not suffer in comparison with alternative procedures as much as might on first view be supposed.

b. The arguments for excess profits taxation as a continuing feature of the revenue system are sufficiently strong to merit its trial under favorable conditions.

c. The general agreement that excess profits taxation should be used in time of war strongly indicates the advisability of building up administrative experience, court decisions, principles, and data before actual conflict and necessity arise.

2. That the Administration should regard the present law in particular, and the principle of excess profits taxation in general, as experimental and exploratory of future possibilities, not as an immediate source of a substantial fraction of the Government's revenue requirements.

a. The existing Act is not a true excess profits tax or a true capital stock tax and can only approach such a status after the passage of a good many years in which the original capital declarations retire into the background, being largely superseded by subsequent capital additions and subtractions.

b. The arguments against excess profits taxation, on grounds of both equity and administration, have been believed to outweigh the arguments for it, and, even in the light of reexamination, they cannot easily be brushed aside.

Specific

1. That rates should be kept low until the development of knowledge as to the actual working of the tax in practice indicates the possibility of its equitable retention or the necessity of its abandonment.

a. There is reason, however, for considering the advisability of introducing a slight progression in rates.

2. That the accounting period on which the excessivity of profits is measured by all means be lengthened. The writer proposes a four-year average, and certainly not less than three years. He also suggests the advisability of seriously considering permission to forward actual net losses indefinitely, or at least for an even longer time period.

3. That when business assets or businesses are sold either (a) their capital value to the purchaser for tax purposes should be the same as the capital value to the seller, or (b) a special capital increment tax should be devised as a levy on the seller to take care of good will and other intangibles that will be capitalized through the sale process and that are excluded from capital when they remain unsold in the hands of their original developer.

a. Under legislation in accord with (a) or (b) above, social policy probably indicates certain distinctions in the treatment of various types of intangibles.

4. That both the capital stock and excess profits taxes should be extended beyond the corporate form of enterprise.

5. That the investments should in general be excluded from capital for purposes of the excess profits tax, and the return yielded from the investments should be excluded from income assessed under the excess profits tax.

6. That the assessment period for the capital stock and the excess profits tax should be made the same and the taxes applied to the average capital for the year. (See p.)

These recommendations with respect to the Federal Income Tax, General Considerations, and Certain Specific Points are made by Mr. Roy G. Blakey.

General

This memorandum is concerned primarily with the Federal income tax, but this tax should be an articulated and integral part of a well planned fiscal system. Therefore, the first recommendation is:

Formulate the main outlines or framework of a well-thought-out, comprehensive, elastic, forward-looking fiscal plan, setting it squarely and firmly on the foundation of the following basic recommendations:

1. Coordinate tax, expenditure, debt, and other parts of fiscal policy.

2. Support strong public credit policy with strong and courageous tax policy.

3. Coordinate fiscal policy with other Government policies.

4. Make tax policy contribute to economic prosperity. (Prosperous business, full employment, large national income, high standards of living, large tax base, adequate Government service, and general welfare are all interdependent.)

5. Devise long time plant of debt management or/and build up reserves in fat years to cushion loan periods. (Requires coordination of tax, debt, and banking policies, -- and more. Budget balancing should be cyclical rather than annual, but the almost universal temptation is to rely too much upon borrowing. This should be avoided by an enlightened tax policy, supported by courageous, shrewd, and tactful statesmanship.)

6. Begin seriously the coordination of Federal taxes with State and local taxes.

Income Tax

General

First, determine role which income and other taxes should play in the coordinated fiscal plan.

It is recommended that the income tax should be drafted to supply approximately one-half to three-fourths of Federal taxes in normal and prosperous years and from one-fourth to one-half in years of serious depression and the first half of recovery therefrom.

If the income tax is relied upon to the extent recommended, a later proportion of the citizenry should share in its payment, chiefly through lower exemptions and increases in normal rates, or as suggested in the next paragraph.

If income taxes are to yield adequate revenues for serious emergencies, especially if they are to obviate the tremendous pressure for less desirable taxes, such as of those on general sales, not only should exemptions be lowered but also effective rates should be substantially increased on the lower and middle surtax brackets as well as upon the highest brackets.

Specific Measures

The following specific recommendations relative to the income tax refer chiefly to matters with which Congress is likely to be concerned, or which it should consider, at the next session. The time available has been insufficient to deal with many important matters; only a few of those mentioned have had intensive attention and more really adequate study.

Rates -- Individuals

Additional revenues will be needed besides what moderate recovery will bring. The income tax share of these revenues that is not supplied by lowering exemptions may properly be secured by one, or a combination, of the following rate changes.

1. An increase of 10 per cent of taxes, calculated under the provisions of the 1934 Act would under present conditions, raise about $44,000,000 from individuals and about $42,000,000 more if applied to corporations also. Under "normal" conditions, represented by 1926 incomes, such a rate increase would yield about $180,000,000 from individuals and about $140,000,00 from corporations, or about $320,000,000 from both individuals and corporations. (These and following estimates are tentative.)

2. Each increase of 1 per cent in normal tax rates would raise about $50,000,000 under present conditions and about $100,000,000 in a "normal" year.

3. Rates of the war-time Act of 1918 substituted for those of the 1934 Act would not increase revenues greatly during depression but would yield about 10 per cent more in a "normal" year and 15 per cent more in a prosperous year (1928 base).

4. Effective rates might be increased by approximately one-fourth, one-half, or by some other fraction of the difference between United States and British schedules. It is estimated that, if FULL British rates were incorporated in the 1934 Act, other provisions remaining substantially unchanged, the yield would be $3,000,000,000 in a year like 1931, $5,000,000,000 in a normal year (1926 basis), and $6,500,000,000 in a year like 1928.

The present writer's preference among the different rate revision suggestions -- assuming lowered exemptions as recommended -- is for a moderate change of rates in the direction of (but not to the extent of) the British schedules, to the extent necessary to meet absolutely essential revenues. This revision should be within the bonds of political expediency, but there should be no shrinking from a courageous tax policy for the maintenance of STRONG public credit even in the face of contemporary unpopularity.

Exemptions -- Individuals

1. Reduce exemption of husband and wife and of head of family from $2,500 to $2,000.

2. If politically feasible, or if much more revenue is needed, reduced exemption of single person to $800 and that of husband and wife to $1,600.

3. Permit no personal exemptions for surtax purposes; allow such exemptions for normal tax only.

4. If the recommendations in paragraph 3 above are not adopted, then deduct the entire personal exemption from the first surtax bracket (or first and second brackets, if the first is not large enough to absorb the entire exemption) and thus prevent the personal exemptions from pushing up the other brackets to which higher surtax rates apply. Much the same thing might be accomplished by applying the Wisconsin plan to the Federal surtax, that is, by making the surtax exemption a flat number of dollars of tax to be deducted from the tax as first calculated without benefit of personal exemption.

Taxing Government Securities

1. Submit the constitutional amendment (Oliver plan permitting the Federal Government to levy non-discriminatory income taxes upon future issues of securities authorized by the States, with provision for returning proceeds ratably to the States, or,

2. Submit a constitutional amendment permitting both Federal and State Governments to levy non-discriminatory income taxes upon each other's future issue of securities. (Government compensation might be included.) (Very doubtful whether three-fourths of States would ratify this.)

3. If neither of the above is politically feasible, enact a statute permitting non-discriminatory Federal and State levies of general excise taxes, measured by income, including income from tax-exempt Federal and State authorized Government securities, upon future issues of such securities.

(To attempt such an excise upon existing issues, as some now propose, would be a breach of faith.)

Joint Versus Separate Returns Of Husband And Wife (Proposals To Eliminate Discriminations Now Existing In Community Property And Other States.)

1. Give husband and wife (and head of family) the option of being taxed on the basis of two separate returns, each for half of total family income and make rate and other adjustment so as to remove discriminations and decrease, increase, or maintain total revenues as desired.

(Plan cannot be made clear in a sentence.)

2. If the above plan is not followed, it would be better to try the Treadway plan than none at all, though its constitutionality is in doubt and it would not eliminate so many existing discriminations as plan 1.

3. Taxing each spouse on income from his or her property plus one-half of income earned by both, with certain optional features, would be better than the Treadway plan in some respect, and its constitutionality may be less doubtful, though this plan removes fewer discriminations than plan 1.

Various Matters

Consolidated Returns. -- Elimination of consolidated returns (except for railroads) in the 1934 Act was probably a mistake but, now that the new provision is in effect, give it a reasonable trial before changing.

Carrying Forward Losses. -- Provide for the carrying forward of losses for two years, not only so-called business losses but capital and other losses in cases where gains would have been taxable.

Or apply some averaging system to eliminate the inequities of arbitrary measurement of income.

Capital Gains And Losses. -- Consider distributing gains and losses equally over years of accrual, not to exceed five years, and taxing the several fractions as if revenue agents had discovered deficiencies for years of accrual (without penalties, of course). The Wood plan, (Senate Finance Committee Hearings, 1934, p. 184) provides for taxing all fractions at rates applicable in year of "realization", and this would be slightly easier to administer though not so equitable. (Other features of the Wood plan are inequitable, some make it ineffective.)

(Professor Haig is to submit a memorandum on Capital Gains, contents not yet known to present writer who makes the above suggestion incidentally.)

Non-Income Related Deductions. -- Discontinue the permission to deduct taxes, mortgage interest, and other expenses on owner-occupied homes and, expenses incidental to securing or enjoying other tax-exempt income of substantial monetary value, whether such income is received in the form of money or otherwise. (But see Act of 1934, section 24 (a) (5))

Depletion And Depreciation. -- Consider seriously the reduction of excessive depletion allowances, making thorough study, not only of depletion, but also of depreciation.

Retroactive Provisions. -- Discontinue making tax provisions retroactive, especially where such retroactivity imposes undue hardships upon taxpayers.

Simplification. -- Simplify and clarify the language in the statute and regulations; and, also in the forms for reporting income. Avoid necessity of reference to too many other laws to ascertain meaning of one in question. On the other hand do not be over-specific especially to the extent of preventing proper administrative discretion from securing better results.

Improved Administration. -- Consider improving the quality of the staff in the Income Tax Unit and in the field. Consider especially improving the quality and number of revenue agents.

Court Of Tax Appeals. -- Consider establishing a Court of Tax Appeals above the Board of Tax Appeals.

These recommendations with respect to the Individual Proprietorship, Partnership, and Corporation (Differential Treatment under the Income Tax Laws); Imputed Income; Miscellaneous Income Tax Matters are made by Mr. Carl Shoup.

Recommendations

(1) (a) Narrow the present wide spread between the corporation tax rate and the normal tax rate. A combination suggested, if increased revenue is needed, is: corporation rate, 13 3/4 per cent, normal rate, 8 per cent. Further study would probably show that other suitable combinations would be, approximately: corporation rate, 12 per cent, normal rate 6 per cent; corporation rate 10 per cent; normal rate 4 per cent; (b) in conjunction with this change, apply the surtax only to the surtax net income less the normal tax payable.

(2) Omit the phrase introduced by the 1934 Revenue Act, in Section 184, reading "(Not in excess of the net income of the partnership)".

(3) Restore Section 183 of the 1932 Revenue Act, and specify that a partner is entitled to his proportionate share of the charitable contribution, subject to the present limitations in Section 23(o).

(4) Specify that capital losses incurred by a partnership shall be deductible by the partner to the extent of his proportionate share therein, subject only to the limitations of Section 117 (d).

(5) Restore the net (business) loss provisions substantially as they existed in the 1928 Revenue Act.

(6) Tax owners of homes on net imputed income; and consider seriously the taxation of non-cash income derived from an individual's own efforts, as, for instance, food given and consumed by the same individual.

(7) Disallow deductions now granted that represent expenses not connected with the receipt of taxable income (bad debts, interest, and casualty and theft losses).

(8) Consider restricting the present allowances for traveling expenses.

(9) Impose penalties on those who fail, though not "Willfully", to fulfill requirements of the law with respect to filing information returns.

(10) Require Federal disbursing officers to file information returns.

(11) Eliminate the exemption of Federal bond interest from the informational requirements.

(12) Make certain verbal changes in sections 25 (a)(2) and 25 (a)(5)(A) of the 1934 Revenue Act.

Recommendations (1) above could either increase, decrease, or leave almost unchanged the total revenue form the tax. Recommendations (2), (3), and (4) would cause some, but not material, loss in revenue. Recommendation (5) would cause a fairly substantial loss in revenue, to be made up by an increase in rates. The remaining recommendations would increase revenue from the income tax, especially recommendation (6). The writer cannot, in the time at his disposal, suggest approximate amounts to be gained or lost under all of the above provisions, but he feels that even the changes that would decrease revenues are so desirable that they would be well worth the cost.

These recommendations with respect to the Liquor Taxes are made by Mr. K. M. Williamson.

1. Recommendations

The following recommendations are submitted with reference to the taxation of spirits, beer, and wine.

A. Spirits

1. The Federal excise on distilled spirits should be reduced from $2.00 to $1.00 per proof gallon until bootlegging is reduced to more reasonable proportions.

2. The tax upon rectified spirits should be reduced from 30 to 15 cents per proof gallon.

3. A special tax upon the profits of distillers and rectifiers should be enacted at the time of the reduction of the gallon taxes upon distilled and rectified spirits.

4. The customs duty should be reduced by the bargaining process if possible. If reduction by that process is not effected by the time of the meeting of the next Congress, the duty should be cut by the Congress to at least $1.50; the proposed internal excise of $1.00 would be in addition to this rate.

5. No attempt should be made to accomplish a withdrawal of the States from gallonage taxation. The political and technical difficulties involved in working out a practicable plan of avoiding the conflicting Federal and State taxation of liquors seem to destroy the hope of restoring to the Federal Government the sole taxation of liquors on the product basis. (See, for a discussion of the larger question of the Relation of Federal, State, and Local Revenue Systems, Memorandum by Professor R. M. Haig.)

6. The present method of collecting the tax on distilled spirits from the producer should be continued. The collection of the tax further along the chain of distribution would increase evasion and administrative difficulties.

7. The plan of graduating the rate of the tax upon distilled spirits in accordance with the degree of proof of liquor should not be adopted until bootlegging has been reduced. The plan has advantages, however, and should be further studied to determine the advisability of its introduction in the future.

8. A Federal monopoly of distilled spirits, which has been proposed should not be further considered, until the present experiments with control and taxation have had a longer trial.

B. Beer

9. The internal tax on beer should remain at the present rate of $5.00 per barrel of 31 gallons.

10. The customs duty on beer should be lowered. If the bargaining policy is to be used, the rate should be cut by the maximum permitted amount to at least 50 cent per gallon. If the bargaining policy is not to be followed with reference to beer, Congress should reduce the duty to 25 cents. The internal tax should then be made applicable to beer as in the case of other alcoholic beverages.

C. Wine

11. The present excise rates on wines should not be changed.

12. The customs duties on still wines, champagne, and liquors should be reduced. The rates now prevailing should be reduced through bargaining by at least one-half, to sixty-two and one-half cents for still wines, to $3.00 for champagne, and to $2.50 for liquors. If this is not done Congress should make the reductions to these figures.

D. Brewers

Wort and Grape Concentrates.

13. The present manufacturers' excise taxes upon brewer's wort and grape concentrate should be continued instead of being allowed to lapse after June 30, 1935 as at present provided.

These recommendations with respect to the Manufacturers' Excise and Special Taxes are made by Mr. Carl Shoup.

Summary Of Recommendations

(a) In general, the taxes discussed in this memorandum should be retained only in an emergency. Few if any of them are suitable for use as permanent elements of the fiscal system.

(b) If some of these taxes must be retained temporarily, certain of them are decidedly more desirable than others. Details are given in the section below, "Summary of Conclusions from a Revenue Point of View", where the taxes are divided into four groups. Preference should be given to the taxes on toilet articles (except dentifrices and soap), radio and radio parts, electrical energy (if shifted to consumers), and admissions, and to a low rate tax on real estate transfers.

(c) Taxes on articles used almost exclusively by the wealthy yield little revenue, and slight income-tax increases should be substituted for them.

(d) Some change is needed in the camera tax if it is to be retained; the tax should apply to parts of cameras, or should be replaced by a tax on camera films.

(e) Under the radio tax, the complete radio set should be taxable, with provisions to eliminate double taxation.

(f) The penalty provisions of the admissions tax need strengthening.

(g) The wording of the club dues tax should be altered.

These recommendation with respect to the Sales Tax are made by Mr. Carl Shoup.

Recommendations

(a) A sales tax should not be used to replace any of the tax revenue now being received by the Federal Government.

(b) Even if revenue needs should force an increase in taxation, it would be preferable to rely first on increases in income and estate taxes, and possibly on some of the temporary excises, before levying a sales tax.

(c) If a sales tax is to be levied, it should be a manufacturers' sales tax, unless the rate required is 8 per cent or more when it might be better to impose a general sales tax at a lower rate.

(d) If a manufacturers' sales tax is to be levied and if revenue needs permit, the tax should be levied only on finished products not including any products the purchase of which, by a taxable manufacturer, represents a business expense deductible for income tax purposes. That is, exemption should be granted to sales to taxable manufacturers, not only of materials, but also of equipment (e.g. machinery) and supplies (e.g. oil for machinery, fuel).

(e) Further, if possible from a revenue viewpoint, articles of food should be exempt and perhaps also certain articles of clothing.

These recommendation with respect to the Tobacco Taxes are made by Mr. Reavis Cox.

Recommendations And Suggestions

The effects upon tax revenues of trends in tobacco consumption. -- Of primary importance in an analysis of the tobacco taxes, such as is made by the present memorandum, are the prevailing trends in tobacco consumption. The lag shown by the consumption of tobacco products in entering the depression and its promptness in recovering from the depression, indicate that it is still following the trends which characterized it in the 'twenties. As to leaf tobacco, this means that a year-to-year increase in consumption may be expected; but what it probably will not be much (if any) greater than the growth of the population. Soon or late, even this growth may be expected to slow down, since there is some reason to believe that the number of pounds of tobacco used per consumer (on the average) is declining because of changes in consumption of small cigarettes is continuing to grow rapidly, the consumption of snuff and smoking tobacco is growing slowly, the consumption of class A cigars (selling for 5 cents or less at retail) is growing still more slowly, and the consumption of all other products is declining.

These matters concern the Treasury indirectly because of their significance for agricultural relief policies. Of more immediate interest is the effect of prevailing trends in consumption upon the revenues from the tobacco taxes. The large increase which has taken place in the receipts from the tobacco taxes since 1919, the year in which the last rate increases enacted became effective, ($206 million in the fiscal year 1919, $450 million in 1930, the peak year, and $425 million in 1934), came not so much from an increase in consumption of leaf tobacco as from the relatively rapid increase in the consumption of cigarettes, by far the most heavily taxed product.

Since the familiar trends seem to be continuing, the Treasury can, with reasonable safety, continue to rely upon a substantial increase in the tobacco revenues from year to year, if the rates remain unchanged. Whenever the shift to cigarettes slow down, (as it must in time), the rate of increase in the revenue from year to year must slow down greatly. If a reverse shift should set in, (which seems most unlikely just now), and, say, pipe tobacco should begin to gain rapidly in favor while cigarettes lost, the revenue could enter upon a year-to-year declined in the face of an increase in leaf consumption, because of the wide disparity between the rates on smoking tobacco and that on cigarettes.

Confident prophecies concerning tobacco consumption (and therefore tobacco-tax revenues) are impossible in the absence of adequate data on the subject. The matter is vitally important to the Treasury, not only in the matter of estimating future revenue, but also because satisfactory tax policies can be built only upon a foundation of accurate information as to the burden imposed by the tax and who bears it, the nature and permanence of the tobacco habit, prices paid for tobacco products, differences among geographical areas as regards tobacco consumption, and allied matters.

It is, therefore, suggested that if the Federal Government intends to continue this winter the policy of using emergency relief workers for research projects similar to those conducted last winter, the Treasury request the setting up of such a project to study tobacco consumption. The survey could well be made in cooperation with other interested governmental agencies, such as the Bureau of Foreign and Domestic Commerce, the Bureau of Labor Statistics, the Bureau of the Census, and the Agricultural Adjustment Administration. In making this suggestion, the present writer should not be understood to recommend continuance of last winter's relief policies, since this matter lies outside his proper province. Neither should he be understood to recommend an elaborate study by the Treasury apart from relief activities. On the contrary, a special expenditure for this purpose at the present time would be undesirable. The writer means to suggest only that if, for reason apart from fiscal policy, the Administration plans to spend funds on such projects, this particular one promises to yield worthwhile results.

Specific Recommendations. -- As to immediate tobacco-tax policies, the writer offers the following conclusions:

(1) The Nature Of The Tobacco Tax.

(a) It is recommended, for reasons given below, that the tobacco taxes be changed from specific taxes on specified quantities of the various products to the nearest practicable of the various products to the nearest practicable approximation of ad valorem taxes.

(b) If stability of revenue is to be the dominant consideration, (which the writer does not recommend), it is suggested that the Treasury may well consider adapting to American conditions the British system of basing the tax on the amount of leaf consumed rather than on the numbers of units of specific products sold.

(2) The Amounts Of Revenue To Be Derived From Taxes Imposed Upon Tobacco.

(a) It is recommended that there be no change in rates at the next session of Congress such that the amount of revenue derived from the tobacco tax will be reduced. This recommendation is made regretfully, since the tax on tobacco is very high, when measure by a number of criteria to be considered below; but the fiscal situation necessitates high taxes, and the tobacco taxes are too reliable and too productive to be reduced at this critical juncture. Possible alternative taxes (such as a reduction of the income tax exemptions) are needed for other purposes or (as with general sales taxes) are even less desirable than high tobacco taxes.

This recommendation rests upon a conclusion from the available evidence that, because the demand for tobacco products in inelastic, a reduction of the taxes would entail a reduction of the revenue. The reader should note that because of the inelasticity of the demand, the tax seems to rest chiefly upon the consumers and that the farmers and manufacturers suffer relatively little through reductions in consumption caused by the tax. Correspondingly, most of the benefit from a reduction of the tax (and most of the burden of the increase) would go to the consumer.

(b) It is suggested (but not recommended) that a substantially larger revenue can be obtained from tobacco through rate increases. It is recommended that no recourse be had to this expedient until much heavier reliance has been made upon income and estate taxes, both because the tax on tobacco is already very high and because the organized political opposition to an increase in the tobacco tax is very strong.

(c) It is recommended that, before suggesting or endorsing any change in the tobacco taxes for the supposed benefit of the farmers, the Treasury make a careful analysis to see whether the farmers really will benefit and, if so, which "farmers", i.e., the land-owners, tenants, or laborers.

(d) It is recommended that, if the tobacco taxes are changed, care be taken to amend the statutory package regulations as needed to permit reflection of the changes in the prices.

(3) The Amounts Of Revenue To Be Derived From Taxes On Specific Products.

(a) It is recommended that in deciding how much revenue shall be drawn from each of the various tobacco products (in other words, the rate to be imposed on each product) the Government be guided chiefly by two principles: (1) Just distribution of the tax burden among the individual consumers of tobacco. (2) Protection of the Treasury against wide price swings. It is recommended that comparatively little weight be given to the argument that through an adjustment in the tax rates, competition (especially in cigarettes) can be increased. Any increase in competition probably would be small, and the consequent benefits to consumers and leaf growers probably would not be large enough to warrant the sacrifice by the Treasury of the advantages in administration of the tax which grow out of the fact that the producers are few. It is also recommended that comparatively little weight be given to the idea of preserving or establishing (through tax adjustments) particular priced classes of products, such as 12 1/2-cent cigarettes, 10-cent cigarettes, nickel cigarettes and 2-for-5-cent cigars. Such adjustments can be only temporary in their effectiveness, since prices depend upon many costs other than taxes.

(b) In accordance with the foregoing, it is recommended that the tobacco taxes be imposed upon units of retail price rather than upon units of quantity as at present. To give an illustration, if 2 1/2 cents be taken as the desirable price unit, a tax (which will approximate the present rates per 1,000) can be imposed upon cigarettes at the rate of 1 1/4 cents for each 2 1/2 cents (or portion thereof) of the retail value, including the tax. The exact rate will be determined, of course, by the amount of revenue desired. This plan approaches ad valorem taxation as nearly as administrative considerations will permit. As visualized here the taxable retail price will be the price per package or other unit customarily sold, without regard to the quantity of tobacco the package or unit contains, which will make no difference to the Treasury unless the rates are progressive. If necessary, for reasons not now apparent, the price units and corresponding tax units can continue to be quoted in terms of the customary trade quantities, I.E. per 1,000 cigars or cigarettes and per pound of manufactured tobacco and snuff.

 
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