(c) It is recommended that the tax rates be proportional, not progressive. That is, the tax should be the same for each price unit, regardless of the total price. Thus, in each 2 1/2 cents of price, not 3/4 of a cent for the first 2 1/2 cents of price, 1 cent for the next 2 1/2 cents, 1 1/4 cents for the next 2 1/2 cents, and so on.

(d) It is recommended that the Government go as far as political expediency will permit in making the tax rate uniform for all products. Most equitable would be a single rate for each unit of value (say, for illustrative purposes, 1 1/4 cents for each 2 1/2 cents of price) applied to all products alike. Under such a plan 2 1/2 cents worth of tobacco would pay 1 1/4 cents tax regardless of the form in which it was consumed, I.E., whether as cigarettes, cigars, snuff, or manufactured tobacco. As before, the exact rate set would depend upon the revenue wanted. Preferably it would be set so that (in accordance with the recommendation above) the total revenue drawn from tobacco would remain unchanged.

It is suggested that even if complete equity cannot be granted for political reasons, some degree of equity should be granted. In particular, if the tax load is changed at any time, equity can be served by increasing the low-tax products more sharply than the high-tax ones in the event of an increase or, in the event of a decrease, by reducing them less sharply than the high-tax products. This plan is much to be preferred over a horizontal change representing an equal percentage for all product; such as has been advocated by some groups.

(e) It is recommended that in setting the price units for tax purposes, two safeguards be kept in mind, (1) The price units should be narrow. (2) There should be no schedule of prices (as with cigars at present) such that all products above a specified price would pay a specified price would pay a specific tax regardless of the heights to which they rose. In the absence of these safeguard, the revenues will not increase as they should if wide price swings occur.

(f) It is recommended that for administrative reasons, the tax be based solely on retail prices, including the tax. That tax should not be based either on wholesale prices or on wholesale and retail prices combined. It is suggested, however, that, if the Government wants to control profit margins in the industry, the use of brackets combining wholesale and retail prices offers possibilities that should not be over-looked.

(g) It is recommended that the system of determining retail values for tax purposes shall be the one already used for cigars.

(h) It is suggested that if the recommendations here made are adopted, the Bureau of Internal Revenue issue revenue stamps in terms of price units rather than in terms of quantities of the various products as at present.

(i) It is suggested that adoption of these recommendations will make desirable a careful reconsideration of the statutory control over package sizes to determine what (if any) amendments should be enacted. The law continue to provide that tobacco shall be sold only in a limited number of packages, but define these packages in terms of price rather than in terms of quantities. This procedure would reduce to a minimum the number of revenue stamps needed and ease the administrative problem of checking evasion.

(4) Disposition Of The Tobacco-tax Revenue.

(a) It is recommended that the final choice of a plan for sharing the tobacco-tax revenues with the States be deferred until after a solution has been found for the general problem of Federal-State-local fiscal relations.

(b) In the meantime, since the matter must be considered for tobacco alone without reference to the general problem, it is recommended:

(1) That the Doughton Resolution (or any other plans based upon the idea of having the Federal Government share its revenue with the States) be rejected, and

(2) That the Federal Government merely confine itself to keeping its tobacco taxes at levels which will leave an ample margin for taxes in those States which wish to impose them. This consideration adds force to the recommendation above that tobacco taxes should not be increased except as a matter of extreme need.

(c) If, for reasons not now apparent, the Doughton Resolution (or something like it) must be accepted, the following changes are recommended:

(1) The plan should apply to taxes on all tobacco products, not to cigarette taxes alone.

(2) The State's shares should be allocated on some basis which measures each State's contribution to the Federal revenue from tobacco better than does a crude population figure. A possible alternative measure is the retail sales of tobacco products in each State. This problem adds force to the suggestion above that a study should be made of tobacco consumption if possible.

(3) Some assurance should be sough that the States now taxing tobacco will be accept the plan.

(4) A more careful analysis and investigation should be made to determine how large a fraction of the tobacco revenue must be given the States to include them to come in and stay under the plan.

(5) Provision should be made for local taxes on tobacco products as well as for State taxes.

(6) Since the plan will otherwise entail a loss of revenue to the Federal Government, if it is adopted is should be compensated for by an increase in the tobacco tax rates or in the revenue from other sources.

(5) Miscellaneous Matters, Including Steps To Be Taken Against evasion.

(a) Because the privilege now given farmers of selling their own leaf to ultimate consumers tax-free has resulted in a formidable amount of tax evasion, it is recommended that the privilege be abolished or (as a second choice) be restricted to sales on the premises direct to consumers in person.

(b) As further checks upon rapidly increasing evasion of the tobacco taxes in the leaf-growing areas, it is recommended:

(1) That tobacco farmers (by which is meant preferably the land owners) be required to report the amounts of they sell and the names of the purchasers.

(2) That Sec. 403 (f) of the Revenue Act of 1926 (which rules that a tobacco farmers' cooperative association is not a dealer in leaf as defined by the law) be repealed.

(3) That all farmers' agents (including cooperative associations) be required to register as dealers in leaf tobacco and be governed by the restriction imposed upon dealers, (including the requirements that they give bond, pay the taxes for which they become liable, keep complete and detailed records as required by the Bureau of Internal Revenue and make monthly reports on purchases, sales and stocks of leaf tobacco).

(4) That no farmers' agent be permitted to sell or ship tobacco under more than one trade name.

(c) In connection with these recommendations designed to reduce evasion, it is suggested that they will not substantially injure the leaf growers (since most of the benefit from the present privilege has gone to so-called agents), that they should result in an appreciable revenue increase, and that they will protect legitimate, tax-paying manufacturers from an obviously unfair competition.

(d) It is recommended that tax-free cigarette papers be abolished and that the following rates be established: Packages or booklets containing not more than 25 papers, (which are tax-exempt at present), 1/4 cent; packages or booklets containing more than 25 but not more than 50 papers, 1/2 cent; for each additional 50 papers (or portion thereof), 1/2 cent.

The reasons for the above recommendations and suggestions are given in detail in the following memorandum.

Since Memorandum R is almost wholly a factual survey of the tax burden, and contains no specific recommendations for changes in the tax laws, the present section does not contain any material from that memorandum.

/1/ With respect to which of these taxes might be retained after other sources had been tapped, see below.

/2/ Mr. Bryan, while not dissenting especially from anything said in this section, is not associated with the formulation of the problem adopted under this title.

/3/ For statements of these rules, see, for instance, Gregory, op. cit., pp. 489 - 490, and Lutz, op. cit. p. 519.

/4/ The writer is informed that the Tariff Commission has in preparation a statistical study of the Free List which will doubtless prove valuable for this purpose.

/5/ By the elimination of Section 303 (4).

/6/ New section to provide for personal exemptions.