Date 20 September 1934
Author Carl Shoup
Title The Federal Revenue System: Manufacturers' Excise and Special Taxes
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.


Carl Shoup

Appendix 1.    Taxes On Oleomargarine, Adulterated and Process or
               Renovated Butter, filled Cheese, Mixed Flour and
               White Phosphorous Matches.

Appendix 2.    Federal Control of Commodity Exchanges on Which
               Commodities Are Sold For Future Delivery

Reavis Cox




     Yield of Jewelry Tax
     Soft Drinks Tax Revenue
     Admissions Tax Revenue
     Yield of Insurance Taxes 1918-1922

     Yield of Tax on Telephone, Telegraph, Cable, and
     Radio Messages

     Yield of Transportation Taxes

                          Table of Contents

Summary of Recommendations

Miscellaneous Taxes in General

     Subject of Present Memorandum
     Duplications of Certain Parts of Other Memoranda
     Revenue Aspects of the "All Other" Taxes
     Basic Reasons for "All Other" Taxes

     Certain Indirect Taxes Grouped According to Income
     Levels of Ultimate Taxpayers

     Certain Desiderata in Indirect Taxation

Summary of Conclusions from a Revenue Point of View

      Expiration Dates of Present Taxes

Description and Analysis of the Several Taxes
Manufacturers' Excise taxes

      Cameras and Lenses
      Chewing Gum
      Dirk Knives, etc.
      Electrical Energy
      Firearms and Ammunition
      Mah-jongg etc. Sets
      Patent Medicines
      Radio Parts, Radio-Phonographs, Records, Pianos, etc.
      Smoking Accessories
      Soft Drinks:-General Description
      Soft Drinks: Historical Summary
      Sporting Goods
      Thermos Bottles
      Toilet Articles: General Description
      Toilet Articles: Historical Summary
      Vending Machines

Miscellaneous Excise and Special Taxes

      Admissions: General Description
      Admissions: Historical Summary
      Art Works
      Clothing, Luxury
      Club Dues and Initiation Fees
      House Furnishings
      Passage Tickets
      Playing Cards
      Pleasure Boats
      Powers of Attorney and Proxies
      Produce (Sales for Future Delivery)
      Promissory Notes
      Real Estate Transfer
      Sale Deposit Box Leases
      Security Issue
      Security Transfer
      Telephone, Telegraph, Radio, and Cable Facilities
      Trunks, Purses, etc.
      Watches, Glasses, etc.

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.

Miscellaneous Taxes in General

SUBJECT OF PRESENT MEMORANDUM. -- "The present memorandum deals with a miscellaneous group of Federal internal revenue taxes, not readily designated by any one name. Most of them are "indirect" taxes, in the sense that they are commonly thought to be shifted by the payers to other persons, ultimately to the final consumer. They include all the Federal internal revenue taxes other than the taxes on estates and gifts (see memoranda by Walradt), excess profits, capital stock, and automobiles and related products (see memoranda by Bryan), income (see memoranda by Blakey and Shoup), liquor (see memorandum by Williamson), tobacco and processing-tax subjects (see memoranda by Cox).

The most important items considered here, from a revenue viewpoint, are the taxes on admissions, checks, communications (telephone, telegraph, etc.), electrical energy, transfers of capital stock, and a group of manufacturers' "excise" taxes on certain luxuries or semi-luxuries, chiefly articles of fur, jewelry, refrigerators, sporting goods, and toilet preparations.

DUPLICATIONS OF CERTAIN PARTS OF OTHER MEMORANDA. -- To discuss these taxes adequately the writer has found it necessary to make a few remarks concerning certain taxes treated exhaustively in other memoranda, and the first part of this memorandum will be devoted to a general survey of the Federal revenue system exclusive of taxes on excess profits, estates, gifts, and income. These taxes can be grouped together and omitted from consideration in this memorandum because (a) the reasons for their existence are markedly different from those usually applicable to the other taxes, and (b) their continued existence, with the possible exception of the tax on excess profits, seems assured.

Not all of the taxes considered in this memorandum can be called "indirect," and the term "all other taxes" is therefore used in the following paragraphs, this term being taken to mean all other than the four taxes noted above.

REVENUE ASPECTS OF THE "ALL OTHER" TAXES. -- These "all other" taxes (including customs duties), although increasing in absolute amount of revenue yielded, furnished a steadily declining share of the total Federal tax revenue from 1914 through 1918. From then until 1923 their relative importance increased as income tax rates were reduced, but from 1924 through 1931 their share declined. The last three years have shown a marked increase in their relative importance. The following figures show the percentage of total Federal tax revenue furnished by these "all other" taxes, INCLUDING CUSTOMS DUTIES, in 1903 and from 1914 to date:

                 1903                     100
                 * * * *                 * * *
                 1914                      91
                 1915                      87
                 1916                      83
                 1917                      65
                 1918                      25
                 1919                      34
                 1920                      29
                 1921                      31
                 1922                      37
                 1923                      43
                 1924                      42
                 1925                      40
                 1926                      38
                 1927                      33
                 1928                      34
                 1929                      33
                 1930                      32
                 1931                      32
                 1932                      41
                 1933                      56
                 1934                      69

It will be noted that in 1934 these "all other" taxes (including customs duties) played a relatively greater role than for any year since 1916, when the income tax was being collected at rates that now appear extremely low.

If customs are excluded from the "all other" taxes, but not from the revenue total, the percentage become:

                 1903                      45
                 * * * *                  * *
                 1914                      48
                 1915                      53
                 1916                      54
                 1917                      43
                 1918                      20
                 1919                      29
                 1920                      23
                 1921                      25
                 1922                      27
                 1923                      25
                 1924                      26
                 1925                      23
                 1926                      21
                 1927                      16
                 1928                      17
                 1929                      16
                 1930                      16
                 1931                      19
                 1932                      24
                 1933                      45
                 1934                      58

It is of interest to note that the peak percentage is the one shown for 1934.

The change in the nature of the Federal taxing system that has occurred in the past two years is somewhat exaggerated by the figures above. From the viewpoint of revenue yield the data of course tell the true story; the business depression, however, masks the drastic increases in income tax rates, and the natural lag in collection does not permit the data through 1934 to show the full effect of recent increases in estate tax and gift tax rates. Furthermore, many of the indirect taxes have expiration dates in 1934 and 1935, and the processing taxes, although tagged with no expiration dates, are presumably to last only as long as the agricultural crisis.

Bearing in mind these important qualifications, one may still say that from the revenue standpoint the Federal tax system in 1929-30 resembled that of England, whereas today it resembles that of one of the great indirect-taxing countries, France. Every indirect tax imposed by the French National Government is likewise levied by the Federal Government, with the important exceptions of the general sales tax and the taxes on land and water transportation, and with a few relatively unimportant exceptions. /1/ On the other hand, France levies no special taxes on a number of articles taxed by the Federal Government. /2/ True, a mere list of taxes may be deceptive, and in comparison with France it must be recalled that State and local revenues bulk large in this country and are raised chiefly from the property tax.

BASIC REASONS FOR "ALL OTHER" TAXES. -- Were it not for political and administrative difficulties, the writer believes that the "all other" taxes, even in times such as these when a large amount of revenue is required, should play an almost insignificant role in the Federal fiscal policy--with the exception of taxes whose proceeds are spent chiefly for the benefit of the group taxed, as is true to a certain extent of the gasoline tax. The income, death, gift (and excess profits) taxes could achieve any purely fiscal aims that are set for the "all other" taxes /3/ and in addition could reach objectives beyond the power of the latter. /4/ With respect to non-fiscal aims (e.g. restriction of consumption of spirits, "subsidy" of certain manufacturing and agricultural interests through the tariff), which are in a measure achieved by indirect taxes, the presumption is that these aims could be reached more nearly by non-tax measures.

The validity of the statements above can best be tested by reference to one of the "all other" taxes.

Consider the tax on admissions. Why are admissions taxed, and not salt? Obviously, one answers, because the latter is a necessity that even the poverty-stricken must have, whereas purchase of the former is evidence, if not of luxury, at least of a well-being that forms a basis for equitable taxation. It is clear, however, that an income tax can, on paper at least, be more closely adjusted to the relative well-being of various citizens than can the admissions tax or any combination of such "all other" taxes.

Why, then, is a certain amount of revenue obtained from an admissions tax rather than from the taxes on income, death, etc.? One of the chief answers is: political and administrative difficulties. For instance, there may be many persons who spend an appreciable amount on admissions and hence pay the admissions tax, but who cannot, for political and administrative reasons, be asked to pay the same amount instead directly on their wages, salary, and other income.

A further answer sometimes given is that the person whom it is desired to reach has no net income during certain years of the depression, especially if "income" is taken in a broad sense (e.g. after deduction of losses). Sometimes this answer is expanded to the extent of saving that the country as a whole has not the net income (as defined by the tax law) to carry on the Government.

These two factors in the problem -- political or administrative difficulties and absence of taxable income -- must now be examined further.

The political or administrative difficulties will first be considered. For purposes of further illustration, it is necessary to divide all those who spend money on admissions into two classes: (a) those whose taxable income is so low that they are not at present subject to the income tax, and (b) those who are subject to the income tax. It is probable that political and administrative objections to substitution of the income tax for the admissions tax are more powerful with respect to the first group than the second. For the first group the substitution would mean installation of tax consciousness and collection of small amounts of money. For the second group it would merely mean an increase in rates. Indeed, so marked is the difference that in the mind of the present writer there is raised a PRIMA FACIE presumption against any of the "all other" taxes whose yield comes (ultimately) from persons now subject to the income tax; the political and administrative obstacles faced in attempting to substitute higher income tax rates for such taxes should not be insuperable even in these times, if the matter is properly presented to the public. It is with the first group (a) above that the real difficulty lies.

An important question now arises: Of the indirect tax revenue now collected or to be collected by the Federal Government, how much rest ultimately as a burden upon the those who are subject to the income tax? As with most fiscal questions, no precise answer can be given, but a first approximation may be reached by noting which of the "all other" taxes are probably paid almost wholly by those subject to the income tax. There must be left to one side, for the moment, the more important indirect taxes (e.g. on tobacco and liquor) that strike both classes.

The following taxes probably rest ultimately upon few if any persons not subject to the income tax, although there may be considerable doubt on this point with respect to the taxes on cameras, checks sporting goods, firearms. The figures give the yield in 1933-34 (in millions of dollars) except for those taxes whose 1935 yield is certain to be quite different from that of 1934, owing to changes in rate or scope or effective period. In these cases estimates for 1935 are used.

     Capital Stock (linked with excess profits tax)        80.2

     Bonds of indebtedness, issues of capital stock,       16.3
     deals of conveyance, etc. (rate increases lapse
     June 30, 1935, on bond issues and stock issues;
     bond transfer and real estate conveyance taxes
     repealed as of same date)

     Transfers of capital stock (rate increase lapses      38.0
     June 30, 1935)

     Sales of produce (future delivery) (rate returns       4.5 /a/
     to 1 cents JULY 1, 1935)

     Silver bullion transfers (effective 1934-35)           0.0 /c/

     Articles made of fur, sold by manufacturer             4.0 /a/
     for $75 or more (lapses June 30, 1935)

     Jewelry, etc. sold by manufacturer for                 1.3 /a/
     $25 or more (lapses June 30, 1935)

     Mechanical refrigerators                              5.5
     (lapses June, 30, 1935)

     Sporting goods (lapses June 30, 1935)                 3.8

     Firearms, shells and cartridges, and                  2.6
     pistols, etc. (except as to pistols and
     revolvers, lapses June 30, 1935)

     Cameras and lenses (lapses June 30, 1935)             0.4

     Leases of safe deposit boxes (no lapsing date)        2.7
     Checks, drafts, etc. (lapses Dec. 31, 1934)          41.4
     Club dues and initiation fees (no lapsing date)       6.0
     Total                                               206.7 /b/

                         FOOTNOTES TO TABLE

     /a/ Confidential estimate for 1934-35, made by Section of
Financial and Economic Research. Data for 1933-34 are not useful
here because the scope or rate of the tax was changed by the 1934
Revenue Act.

     /b/ The short-lived dividends tax, which yielded $50.2 million
in 1933-34, is not included.

     /c/ The yield from this source will apparently be negligible.

                          END OF FOOTNOTES

In contrast stand the rest of the "all other" taxes, which are ultimately paid in part by those who are not subject to the income tax (figures, in millions of dollars, represent actual or estimated yield as explained on preceding page).

   Customs duties                                      313.4
   Liquor                                              330.2 /a/
   Tobacco                                             425.2
   Playing cards                                         4.4
   Lubricating oils (lapses June 30, 1935)              25.3
   Brewer's wort, etc. (lapses June 30, 1935)            3.1
   Matches (lapses June 30, 1935)                        7.0
   Gasoline                                            170.0 /a/
   Electrical energy (lapses June 30, 1935)             33.1
   Tires and tubes (lapses June 31, 1935)               27.6
   Toilet preparations (lapses June 30, 1935)           10.8
   Automobiles (lapses July 31, 1935)                   37.6
   Automobile accessories (lapses July 31, 1935)         5.7

   Radio sets, phonograph records, etc.                  3.2
   (lapses June 30, 1935)

   Chewing gum (lapses June 30, 1935)                    0.6 /a/

   Telephone, telegraph, radio, and cable               19.3
   facilities, etc. (lapses June 30, 1935)

   Transportation of oil by pipe line                   10.4
   (lapses June 30, 1935)

                          FOOTNOTE TO TABLE

     /a/ Confidential estimate for 1934-35, made by Section of
Financial and Economic Research, used for the liquor taxes because
the spirits tax was effective only for part of 1933-34, for the
gasoline tax because of a rate change in 1934, and for chewing gum
because the data for 1933-34 are combined with those for the
recently repealed candy tax.

                           END OF FOOTNOTE

Admission (on June 30, 1935 exemption returns to $3)           14.6
Oleomargarine                                                   1.5
Narcotics                                                       0.5
Processing taxes                                              371.4
Total                                                       1,814.9

When the figure $207 million is contrasted with that of $1,815 million, there is at least an indication that a large part of the "all other" tax revenue rests as a burden on those not subject to income tax. The "all other" (chiefly indirect) tax structure therefore appears to be based in large part on a feeling that political or administrative difficulties prevent lower exemptions under the income tax, rather than on a desire to reach the well-to-do classes through channels other than the income tax.

To a certain, extent, however, the other factor noted above -- drop in taxable income -- has played a part. Indeed, looking at the national economy as a whole, one may say that there probably was no net income, in the sense in which "net income" was defined under the 1928 Revenue Act, in 1930-31 and 1931-32. Some income appeared for tax purposes, nevertheless, because the gross losses were not distributed among persons PRO RATA with their gross incomes. Considering only the classes not subject to income taxation, probably one may say that even in 1930-31 and 1931-32 they did have income which would have been taxable had the exemptions been lower, and that this income was tapped, instead, through a number of the "all other" taxes noted above. The following list, showing the "all other" taxes introduced by the Revenue Acts of 1932 and 1934, the N. I. R. Act of 1933, the liquor taxing acts of 1933 and 1934, and the customs duties of 1930 and subsequent years, is of interest in this connection (a question mark (?) indicates estimate rather than actual yield data):

                                                     Yield, 1933-34
Group A (burden on                                   in millions of
income-tax payers)                                       dollars
------------------                                   --------------

Capital stock (linked with excess profits tax)           80.2

Transfer of bonds of indebtedness; conveyance            10.0(?)
of real estate; and 100 per cent increase on
issues of bonds

Increase of 100 per cent of rate on stock transfers      19.0(?)

Increase of 400 per cent on sales of produce for          5.0(?)
future delivery /1/

Use of yachts and boats /2/                               0.2
Articles made of fur /3/                                  7.7
Jewelry, etc. /4/                                         4.7
Mechanical refrigerators                                  5.5
Sporting goods                                            3.8
Firearms, etc. (except pistols and revolvers)             2.0(?)
Cameras and lenses                                        0.4
Lenses of safe deposit boxes                              2.7
Checks, drafts, etc.                                     41.4
Total                                                   182.6

                         FOOTNOTES TO TABLE

     /1/ Reduced to 200 per cent by 1934 Revenue Act

     /2/ Repealed by 1934 Revenue Act

     /3/ Sales under $75 exempted by 1934 Revenue Act

     /4/ Sales under $25 exempted by 1934 Revenue Act

                          END OF FOOTNOTES

Group B (part of burden on non-income-taxpayers)

Customs duties                                             2 /1/
Liquor                                                   258.9
Lubricating oils                                          25.3
Brewers' wort, etc.                                        3.1
Matches                                                    7.0
Gasoline                                                 202.6
Electrical energy                                         33.1
Tires and tubes                                           27.6
Toilet preparations                                       10.8
Automobiles                                               37.6
Automobile accessories                                     5.7
Radio sets, phonograph records, etc.                       3.2
Candy and chewing gum                                      4.9
Soft drinks /3/                                            4.7
Telephone, etc.                                           19.3
Pipe lines                                                10.4

Admissions: lowering of exemption from                    13.0(?)
$3 to 40 cents

Processing taxes                                         371.4
Total                                                  1,038.6 plus
                                                        customs (?)

                         FOOTNOTES TO TABLE

     /1/ It appears impossible even roughly to estimate the part of
the customs yield traceable to rate changes since 1929.

     /2/ Candy tax repealed by 1934 Revenue Act

     /3/ Repealed by 1934 Revenue Act

                          END OF FOOTNOTES

As these figures indicate, the changes that have been made in the "all other" taxes since the depression started accounted (aside from customs duties) in 1933-34 for only $183 million in revenue from taxes that fall almost entirely upon those subject to income tax and, on the other hand, accounted for $1,039 million from taxes falling at least in part on those not subject to income tax. Although-several necessary qualifications can be thought of, the general implication of these figure seems to the writer to be (supposing a given amount of revenue had to be raised) that the growth of the "all other" taxes in recent years has been due more to fear of political and administrative consequences of lower personal exemptions than to the absolute shrinkage of income (as defined by tax law) throughout all sections of the population. To the extent that this implications is justifiable, repeal of any large amount of the "all other" taxes cannot be counter-balanced by merely increasing rates of the present income tax unless the Government is willing to make a decided shift of part of the present tax burden from the shoulders of the poor and lower middle classes to those of the upper middle classes and the well-to-do. If it is desired to repeal many of these "all other" taxes and yet make no decided shift in the distribution of the tax burden, the Government must be willing to instill tax consciousness into a large group of persons not now subject to direct taxation and to bear the administrative burdens involved in such a task.