CERTAIN INDIRECT TAXES GROUPED ACCORDING TO INCOME LEVELS OF ULTIMATE TAXPAYERS. -- With these general remarks on the "all other" taxes as a group out of the way, attention may now be devoted specifically to the taxes that form the chief topic of the present memorandum. Continuing somewhat the analysis of the different income-groups of ultimate taxpayers, one may distinguish four groups of taxes.

The examples below are drawn from the tax history of the United States and certain other countries but do not furnish an exhaustive list. Liquor, tobacco, and automobiles and allied items are omitted, and the processing taxes are referred to only incidentally since these taxes are treated in other memoranda. The list is also restricted for the most part to consumers' goods, i.e. omitting such items as advertisements, bottles, dynamite, gunpowder, hemp, iron, leather, moving picture films, and paper. Those taxes that are being used by the Federal Government at the present time are underlined.

(1) Taxes on articles that are used almost exclusively by the wealthy; the middle class use them little if at all, and the great mass of the people not at all: Such articles are works of art, pleasure boats of more than 5 net tons in weight and 32 feet in length (cf. Act of November 23, 1921), high-priced clothing (cf. Act of February 24, 1919), CLUB DUES, high-priced house furnishings (cf. Act of February 24, 1919), JEWELRY (unless imitation jewelry is also included), liveries, riding habits, high-priced trunks, purses, etc., high-priced umbrellas (cf. Act of February 24, 1919).

(2) Taxes on articles and services used by the middle classes to a considerable degree, as well as by the wealthy, but decidedly restricted in use among the poor and probably not used at all by those so destitute as to be on relief rolls: Examples are ADMISSION, CAMERAS, CHECKS, COMMUNICATIONS (telegraph, telephone, cable and radio messages), ELECTRICITY, electric fans, FIREARMS, FURS, gas hotels, hunting and shooting garments, insurance, MINERAL WATERS, phonographs and RECORDS therefor, photographs, RADIOS, REFRIGERATOR (mechanical), SPORTING, GOODS IN GENERAL, thermos bottles, and WATCHES AND GLASSES (except eyeglasses), etc. /5/

(3) Taxes on articles and services whose use is fairly well distributed among all classes save probably the destitute on relief rolls: Examples are candy, cattle (meat), CHEWING GUM, transportation by common carrier, PLAYING CARDS, smoking accessories, soft drinks, TOILET ARTICLES other than soap.

(4) Taxes on "necessities" which are used to some extent even by the destitute; Examples are butter, candles, chicory, coal, coffee, COTTON, and FLOUR (cf. processing taxes), hats, MATCHES, MILK (cf. licensing agreements), OLEOMARGARINE, patent medicines (deemed necessities at least by those who use them), rice (cf. licensing agreements), salt, SOAP, SUGAR, and tea.

The articles in the first (wealthy) group above have not, in the history of this country, yielded much revenue. In the fiscal year 1919-20, for instance, the Federal Government levied taxes on all the articles noted there, and the revenue was only about $30 million to $40 million (after making a rough estimate to exclude imitation jewelry, matches, and clocks, etc., and smaller pleasure boats). The rates were low, averaging perhaps not far from 5 per cent of the retail price, but in comparison it may be noted that the 5 per cent of tax (on MANUFACTURERS' sale price) on candy alone (group 3) yielded $23 million, and the taxes on soft drinks, $57 million.

It is, then, to the last three groups of taxes that attention must be directed in the search for large amounts of revenue. Choice among these taxes will be guided to a considerable degree by certain factors to be noted in the section immediately following.

CERTAIN DESIDERATA IN INDIRECT TAXATION. -- Before approaching each of the taxes covered in this memorandum, some consideration must be given to the qualifications of indirect taxes in general. If the government searches for an "ideal" commodity for indirect taxation, it look for one

(a) that has, at any one time, a decidedly inelastic demand, so that within a considerable rate range the amount of revenue forthcoming will be roughly proportioned to the rate. This characteristic has obvious fiscal advantages for the Government and also allows the rate to be changed without greatly disturbing conditions within the taxed industry, thus avoiding drastic shifts in the labor market, waste of capital, etc. It is disadvantageous if the purpose of the tax is to check consumption, but it may be assumed that the primary purpose of our indirect taxes must be to raise revenue.

In connection with this problem there should be noted the extent to which the taxed article has to face closely competing untaxed products. Salt, sugar, and beer, for example, differ obviously in this respect.

(b) whose tax is collectable at that stage in the commercial or industrial life of the article where it is handled by the fewest taxpayers, and, in part as a result of this, is collectable in relatively large amounts from relatively few taxpayers. Otherwise, evasion will break down taxpaying morale generally even if it does not at first result in much loss of revenue.

(c) whose tax is collectable when the commodity is transferred to the person (usually the "ultimate consumer") whom the Government desires to burden. Otherwise there is greater danger that part, at least, of the tax will remain as a burden on the various intermediaries who are supposed to shift it. This advantage, however, usually cannot be gained if the advantage noted in (b) above is secured.

(d) whose tax is collectable at an ad valorem rather than specific rate, particularly if the chances of a decided rise in prices in the near future seem to outweigh the chances for a decline. Even if a price decline is imminent, ad valorem taxes are to be favored on the grounds that the real burden of the tax is not subject to increase without action of the governing body.

(e) whose quantity consumed does not fluctuate greatly over a period of time because of conditions of secular growth or decline within the industry, or because of repercussions of periods of business prosperity or depression. This characteristic may be a disadvantage, if one wishes a tax system framed wholly to feed a "cyclical" budget, but for the moment it may be assumed that other taxes can sufficiently supply this unstable element.

(f) that discriminates in the desired manner among various classes of the community -- i.e. urban and rural, racial, age, business and nonbusiness, income, wealth, etc. The last three form the basis of most of the announced intentions of discrimination.

(g) that is sold only, or at least chiefly, to those persons whom it is desired to burden. This removes complexities which exemptions must otherwise introduce. No tax is wholly free from these difficulties, as goods for export, for instance, are, in most countries, usually exempted.

(h) that is collectable with a relatively low "cost of compliance" to the taxpayer. The "cost of compliance" takes many forms -- sometimes elaborate record keeping, sometimes the installation of special manufacturing or distributing equipment and, like the tax payment itself, may be shifted to others.

(i) that is collectable from a group of taxpayers whose personnel does not change rapidly. The rate of turnover in the roadside stand business is, for example, much greater than in the tobacco manufacturing business.

(j) that is manufactured and/or sold by the taxpayer to the virtual exclusion of everything else. This makes record-keeping easier and evasion more difficult. The tobacco manufacturer, for example, sells only tobacco products; the tobacco retailer sells many other things.

(k) that is short-lived, if the tax is to be an emergency one subject to early repeal upon improved conditions. If the article is long-lived, unjust discrimination is exercised against a certain group of consumers. Compare, for instance, emergency taxes on the sale of (a) evening dresses, (b) diamonds. Over the course of one or two years almost all evening dress users will have purchased at least one evening dress, and indirectly will have paid a tax; whereas, the diamond tax will not reach those who have already purchased all the diamonds they desire (say, the older wealth generation) or those whose normal demand for diamonds will not develop for several years (say, the younger wealthy generation).

(1) that can be fairly precisely defined without excluding articles almost completely similar. The taxation of "candy" and "yellow" oleomargarine, for instance, has offered some difficulties of definition.

(m) that is for the most part not sold in units of less than 20 or 25 cents, or at least not less than 5 cents; otherwise, it becomes almost impossible to shift a low rate tax in such a manner as to make the purchaser tax-conscious. Shifting by means of changing the quality or unit quantity of the product takes time and may cause serious disturbance in commercial relations.

No commodity known combines all these virtues and in most instances the requirements are inherently inconsistent with certain others. It is notable that in almost all major countries in the past three decades eight sources of indirect taxation other than customs duties have been dominant in revenue yield. These are: The general sales tax, and taxes on liquor, tobacco, sugar, coffee and tea (certain countries), gasoline, and transportation. In the calendar year 1933, for instance, the French Government received 66 per cent of its total indirect tax revenue (excluding customs) from six source: the general sales tax, and taxes on liquor, tobacco (gross receipt of monopoly), sugar, gasoline, and transportation. /6/ Data submitted in the memoranda on liquor, tobacco, and gasoline elaborate this matter.

Summary of Conclusions from a Revenue Point of View

EXPIRATION DATES OF PRESENT TAXES. -- All of the recently imposed manufacturers' excises expire June 30, 1935, except those on automobiles, their parts and accessories, and tires and inner tubes, which expire one month later, and the check tax, which expires December 31, 1934. Furthermore, the rate increases on the security issuance taxes, the stock transfer tax, and the produce futures sales tax, and the decrease in the exemption under the admissions tax lapse June 30, 1935, The taxes on bond transfers, real estate transfers, pipe lines, and telephone, telegraph, and radio messages also lapse on this date. Judging from confidential estimates made by the Section of Financial and Economic Research for the year 1934-35, these expirations will involve a loss of revenue of some $460 million a year. The repeal of the soft drinks, candy, and boat taxes, by the 1934 Revenue Act, lost the Government about $12 million.

This revenue loss is obviously too heavy to be borne unless economic conditions improve markedly or increases in other taxes make up the difference. It therefore becomes important to consider the various excises with a view to suggesting which of them might be retained in case of necessity.

First it must be noted that the present memorandum, omitting as it does consideration of the taxes on oil, tires and tubes, automobiles and accessories, gasoline, and pipe lines (see Memorandum O), and brewers' wort and malt, etc. (see Memorandum L), necessarily has nothing to say about $276 million of the prospective loss. The remainder, $186 million, is divided as follows, in millions of dollars:

Check                                     42
Toilet preparations                       12
Furs                                       4
Jewelry                                    1
Radio, etc.                                4
Refrigerators                              5
Sporting goods, cameras                    4
Ammunition                                 3
Matches                                    7
Chewing Cum                                1
Electrical energy                         35
Security issuance                          2 (reduction in rate)
Bond and real estate transfer             14
Stock transfer                            16 (reduction in rate)
Produce futures sales                      3 (reduction in rate)
Admissions                                13 (increase in
Telephone and telegraph                   20
Total                                     186 (add $12 million if
                                              candy and soft drinks
                                              taxes are considered)

If revenue conditions permit, the writer advises that all of these taxes and tax increases be allowed to lapse as scheduled, with the exception of the real estate conveyance tax, /7/ as they are not in his opinion desirable for use except in an emergency. He should prefer to see additional revenue obtained from the income tax before retaining any of these taxes. If, however, it is necessary to employ some or all of them, the suggests that they be classed in the order of their desirability as follows (for details explaining the reasons for these choices, see pages 27-82 below):

                                                Estimated yield in
Article or service taxed                        million of dollars
-------------------------                      --------------------

Group A:

Toilet preparations, except dentifrices,                6
mouth washes, and soaps

Radio, etc., at a 10 per cent rate                      8

Electrical energy, if shifted to                       35
consumers /1/

Real estate transfer                               negligible
(at low rate -- see page 72)

Admissions                                             13
Total, Group A                                         62

Group B:

Toilet preparations: double present rate               6

Admissions: eliminate present 40-cent                 30
exemption (conservative estimate:
might be 50)

Sporting goods: retain, and double rate                6
Bond transfer (very rough estimate)                   10
Stock transfer: retain present rate                   16
Produce sales: retain present rate                     3
Total, Group B                                                71

Group C:

Admissions: double present rate, assuming             45
40-cent exemption has been eliminated
(conservative estimate; might be 65)

Check tax                                             42
Ammunition                                             3
Telephone and telegraph                               20
Soft drinks /1/                                       20
Total, Group C                                               130

Group D:

Furs                                                   4
Jewelry                                                1
Refrigerators                                          5
Cameras                                            negligible
Matches                                                7
Chewing gum                                            1
Security issuance                                      2
Total, Group D                                                20

Grand Total                                                  283

                         FOOTNOTES TO TABLE

     /1/ If power companies are to be taxed as such, a special
profits tax would be preferable. See pages 32-33.

     /1./ Assuming rates on the average to be about 5 times those of
the 1932 Act -- e.g. about 25 or 30 cents per gallon of finished
syrup and other rates raised correspondingly. It might be advisable
to change the 1934 METHOD radically, however. See the section below
on admissions taxes.

                           END OF FOOTNOTE

The reasons for this grouping will perhaps become apparent to the reader upon study of the sections below dealing with each tax.

No new subject of special or excise taxation appeals to the writer as being any better than those now in use.

Description and Analysis of the Several Taxes

The following sections describe briefly, and analyze for revenue possibilities, (a) the manufacturers' excise taxes and (b) other excise and special taxes levied by the Federal Government since 1917. Particular attention is devoted to those taxes that either superficially or upon close examination appear to present attractive possibilities for increased revenue.

The automotive group of taxes (automobiles, accessories, motorcycles, gasoline, lubricating oil, transportation of oil by pipe line, and tires and tubes) is covered by Mr. Bryan in Memorandum O; the taxes on oleomargarine, adulterated, process and renovated butter, filled cheese, mixed flour, white phosphorus matches, narcotics, produce exchange sales, and silver speculation are treated by Mr. Cox in this memorandum; the taxes on brewers' wort, malt, grape, concentrate and evaporated grape juice are covered by Mr. Williamson in Memorandum L; and the processing taxes are covered by Mr. Cox in Memorandum N.

Manufacturers' Excise Taxes

CANDY. -- The tax on candy has declined in legislative favor ever since it was introduced by the Act of February 24, 1919 at a 5 per cent rate. After lowering the rate to 3 per cent by the Act of November, 23, 1921, Congress repealed the tax in 1924. Recently the tax reappeared for a brief period, being imposed at a 2 per cent rate by the Act of June 6, 1932 and repealed by the Act of May 10, 1934. The yield was $23.1 million in the fiscal year 1920, the only full year at the 5 per cent rate, and dropped to $20.4 million in 1921 and to $13.6 million in 1922. It remained stable at $11.3 million in 1923 and $11.8 million in 1924. The 1933 yield was only $3.6 million, and that of 1934 apparently about the same.

The wording of the tax remained virtually unchanged throughout 1919-1924 and 1932-1934; the tax was simply levied upon "candy" sold by the producer or importer.

The 1920 yield was at the rate of $4.6 million per 1 per cent of tax; the 1933 yield, on an approximate twelve-month basis, at the rate of $2.0 million per 1 per cent of tax. At a 10 per cent rate the candy tax might yield between $15 million and $20 million, although, since sugar prices have advanced considerably since 1932-33, a slightly higher estimate might be justified.

There is evidence /8/ that much of the production is in the hands of small concerns from whom collection of the tax is relatively difficult, and the retail distribution is so scattered that a special tax on candy at this point would present grave administrative problems. However, administrative authorities have assured the writer that the candy tax was, on the whole, one of the simplest taxes to administer. The main troubles with the tax seem to be that (a) consumers of candy buy other articles of food resembling candy quite closely but still not taxable as candy, and (b) most candy is sold in penny and five-cent lots.

(a) Articles of food such as chocolate-covered or sugar-coated cakes and crackers, sweet cakes, pastry, chocolate-covered ice-cream bars, ice cream, nuts, and dried and fresh fruits were the chief source of complaint by candy representatives who appeared at the revenue hearings. As one witness put it, "Here is an item that on the face of it is candy, which is chocolate and marshmallow and nuts, with a little biscuit base that takes the curse of the tax off. . . ." /9/ This attitude seems to exaggerate whatever unfairness a tax on "candy" may cause; the regulations issued by the Treasury are quite broad in their definition of candy, /10/ and have been upheld in certain important cases by the courts. /11/ However, drawing the dividing line between "candy" and "non-candy" does present a problem in equitable treatment, and certain foods that are clearly not candy nevertheless compete more or less directly with it. /12/

(b) Data quoted from a Department of Commerce study showed that in 1932, 90.6 per cent of the total production of candy consisted of bulk chocolates and bulk candy, penny candies, and candy in the form of moulded chocolate bars retailing at 5 cent and 10 cents -- in general, non-package candy. /13/ The witness estimated that of this non-package candy, 85 per cent was purchased at retail in units of pennies, nickels, and dimes. /14/ Several years before, a witness had made what was obviously a rough guess to the effect that 50 per cent of the total candy output was sold to children in units of 1, 5, and 10 cents. /15/

In view of conditions noted under (a) and (b) above, the candy tax, viewed as a luxury tax to be passed on to ultimate consumers, cannot be highly recommended, and is distinctly inferior to the admissions tax.

CAMERAS AND LENSES. -- Sale of cameras by producers or importers was taxed at 3 per cent under the Act of October 3, 1917. The tax was maintained until repealed by the Act of February 26, 1926, was reimposed by the Revenue Act of 1932, and expires June 30, 1935. The only important changes during the first period were made by the Act of February 24, 1919, which raised the rate to 10 per cent, exempted cameras weighing more than 100 pounds, and added a 5 per cent tax on photographic films and plates other than moving picture film (this tax, too, was repealed in 1926, after the 1924 Act had exempted X-ray films or plates).

The 1932 Act revived the 10 per cent rate, the 100-pound exemption, and added an exemption for aerial cameras; no change has been made since then. The tax is imposed on "cameras . . . and lenses for such cameras", but lenses sold to be assembled in taxable cameras are exempt.

The yield of the camera tax never exceeded $0.9 million a year in the earlier period and has been even smaller during the past two years.

Administration is not difficult except that producers have been avoiding the tax by selling separately the lense and the rest of the camera; thus tax can be collected only on the lenses. Some arrangement such as that used for radios (see section below) seems to be called for here. A better tax from many points of view would be one on camera film, but the writer has not had opportunity to study this possibility thoroughly enough to make any recommendations concerning it.

CHEWING GUM. -- Under the Act of October 22, 1914 there was levied a tax of 4 cents per $1 of retail value of each package, etc. for chewing gum, or substitutes therefor. The tax was changed, by the Act of October 3, 1917, to one of 2 per cent on sales by manufacturers or importers. The tax was increased to 3 per cent by the Act of February 24, 1919, repealed by the Act of 1921, and reimposed, again at 2 per cent, by the Act of June 6, 1932. It expires June 30, 1935.

The tax yielded $1.1 million in the fiscal year 1920, and $1.3 million in 1921. In 1933 the revenue was $0.5 million. /16/

It appears likely that these low-rate chewing gum taxes have in fact not been passed on to the consumer and have therefore been a levy on the manufacturers' profits. So the manufacturers claim. /17/ On the other hand, the manufacturers have been surprisingly silent with respect to what would appear to be a decidedly heavy levy, calculated on a net income basis; other than a one-page brief submitted at the 1932 House hearings, the writer has been unable to find any protest from these interests throughout all the revenue hearings from 1918 to date. Even the one-page brief contented itself with urging that the proposed 5 per cent rate be reduced to 2 per cent. Possibly through a slight deterioration in the product or a slight change in the quantity, the manufacturers have in fact shifted the burden. This would be the thing to expect if the tax were imposed over a long period of time. Otherwise, the tax can be justified, if at all, only as a rough and ready means of sharing in quasi-monopolistic profits.

In view of all these factors, the writer believes the tax should be repealed rather than maintained at present rates. It might be feasible to impose a rate substantial enough to force an increase in the retail price by one or more cents. The article fulfills fairly well all the requirements noted in the section above on "Certain Desiderata in Indirect Taxation" except that it cannot fulfill (b) without failing with respect to (c); its worth under (a) and (f) is at least doubtful, and it is a poor subject of taxation judged by (m). The custom of selling one stick at a time, sometimes through slot machines, presents a special difficulty. On the whole, the writer is not disposed to recommend a high-rate tax on chewing gum.

DIRK KNIVES, ETC. -- The Act of February 24, 1919, levied a 100 per cent tax on the sale, by producer or importer, of dirk knives, daggers, sword canes, stillettos, and brass or metallic knuckles. The tax was repealed by the Act of June 2, 1924. The peak yield (1922) was only $7 thousand; the tax was levied for regulatory, not revenue, purposes.

ELECTRICAL ENERGY. -- Although a tax on electricity passed the House in 1917, no such tax ever became law during the war period, and it was not until the Revenue Act of 1932 was enacted that this source of revenue, now tapped by several States, was utilized. The 1932 Act restricted the tax to electrical energy sold for domestic or commercial consumption, and the "consumption" element of the tax was provided for by requiring that the tax be paid by the vendee, to the vendor. The rate was 3 per cent. About a year later Congress had a change of heart and, by H.R. 5040, enacted June 16, 1933, provided that the tax should be payable by the vendor (omitting all reference to the vendee). Thus the tax was transformed into one on the profits or capital of electric power companies, except insofar as they have been able to induce public service commissions to take it into account in fixing rates since that date. The tax expires June 30, 1935.

The yield in 1933 was $28.6 million; in 1934, $33.1 million.

It is of some interest that in the hearings on the 1934 revenue bill, before the House and Senate Committees, no power company representatives appeared to oppose the tax. The same is true of the Senate hearings on the 1932 bill.

Viewed as a means of levying upon whatever excess profits certain power companies may be earning, the presence tax is an arbitrary and haphazard one indeed. Without too much effort a much less crude instrument, such as a special tax on profits, might be devised for this purpose. Viewed as a consumption tax the electric power tax has marked advantages in administration, in instilling tax consciousness, and in yielding an appreciable revenue without a drastic cutting away of the tax base (this last point is debatable, of course). If consumption taxes must be levied, it is probably one of the better ones. Under a rate higher than 3 or 5 per cent, however, competing commodities, such as gas, may cause serious inroads, and the levy of a gas tax to obviate this brings a stronger element of necessity (e.g. cooking) into the tax base.

FANS. -- Sale of portable electric fans by the producer or importer was taxed at 5 per cent under the Act of February 24, 1919. The tax was repealed by the Revenue Act of 1921. The yield reached a peak of $0.3 million in 1921.

FIREARMS AND AMMUNITION. "The 10 per cent tax on producers' or importers' sales of firearms, shells, and cartridges was introduced by the Act of February 24, 1919, dropped by the Act of February 26, 1926 except with respect to pistols and revolvers, and again put into operation by the Revenue Act of 1932. The annual yield from 1920 to 1925 between $3.4 million and $4.6 million. In 1933 and 1934 the revenue was off sharply, to $0.9 million and $2.6 million respectively including the pistols and revolvers tax). As a relatively insignificant excise tax it seems to have little to recommend it, but it is probably not seriously objectionable. The tax on pistols and revolvers may be retained as a regulatory measure. It, unlike the tax on the other articles, does not expire June 20, 1935.

FURS. "The tax on articles of fur /18/ was introduced by the Act of February 24, 1919, at a rate of 10 per cent on sales by the producer or importer. After being repealed by the 1921 Revenue Act, the tax was reimposed by the 1932 Revenue Act at the same rate. It was amended by the 1934 Revenue Act so that articles sold for less than $75 are exempt. The tax expires June 30, 1935.

In the first full year of its operation, the fiscal year 1920, the tax yielded $15.3 million. In 1921 it gave $9.1 million, and in 1922, $6.5 million. The 1933 yield was $7.5 million, and that of 1934 increased only slightly, to $7.7 million.

Although the revenue figures give no clue, except that one would expect the 1934 yield to be larger than for 1933, there is reason to believe that there has been a considerable amount of evasion of the tax on fur: OPINIONS EXPRESSED BY REVENUE OFFICIALS TO THE WRITER ARE TO THIS EFFECT. /19/ and one would expect this phenomenon in any case in view of the decentralization of the fur-clothing business and the fairly rapid turnover of firms engaged therein. Information given (by interested parties, it is true) indicates that there are anywhere between 10,000 and 30,000 individuals, firms, and corporations who are at one time or another potential taxpayers under the fur tax. /20/ Many retailers, for instance, remodel and repair, or assemble fur pieces and cloth garments for their customers. If the tax must be continued, it would be well to give serious consideration to the plan, recommended by several representatives of clothing manufacturers and retailers, of collecting the tax from the some 80 or 90 dressing establishments. /21/ This would, however, probably make impossible any reasonable application of an exemption figure (see below).

The exemption of goods selling at less than $75, introduced by the 1934 Act, apparently developed from a feeling that articles trimmed with or made of cheap furs -- rabbit, opposum, etc. --, many of which sell for $10, $15, or $20, are not fit subjects for a luxury tax. To the writer's mind, the chief objection to applying the luxury concept to furs is not this, but the fact that in cold climates certain types of fur garments are nearly as much necessities as any other article of clothing, although the present $75 dividing-line may answer this objection. This point is particularly important inasmuch as furs are now the only articles of clothing subject to a special tax, and are handicapped by this differential treatment.

In general, the fur tax is to be ranked low in the scale of excise taxes.

JEWELRY. /22/ -- After experimenting with a producers' tax for a year or two during the war, Congress changed the base of the jewelry tax to the retail price. When the jewelry tax was reimposed by the 1932 Revenue Act it, in common with the other 1932 luxury taxes, was levied on sales by producers or importers. The first producers' tax (Act of October 3, 1917 to Act of February 24, 1919) was at 3 per cent, the retail tax (Act of February 24, 1919 to Act of February 26, 1926) at 5 per cent, and the recent producers' tax (expiring June 30, 1935) at 10 per cent.

The first tax was restricted to jewelry, real or imitation; the second included also pearls and precious and semi-precious stones and imitations, and articles made of, or ornamented, mounted, or fitted with, precious metals or imitations and ivory. Surgical instruments were except under the 1919 Act, the 1921 Act added eyeglasses and spectacles, and the 1924 Act extended the exemption to cover musical instruments, silver plated flat tableware, articles used for religious purposes, and, most important, articles sold for $30 or less (this seems to account for the sharp drop in receipts in 1925). The 1932 tax covered the same things as that of 1919, with exemption granted to surgical instruments, silver plated ware, frames or mountings for spectacles, or eyeglasses, articles used for religious purposes, and all articles sold for less than $3. This figure was placed at $25 by the $1934 Revenue Act, which otherwise left the tax unchanged.

Administrative officials have informed the writer that the jewelry tax has give more trouble than any of the other excises except the one on furs. This seems to be largely because so many "consumers" of jewelry become "manufacturers" by taking precious stones to jewelers, working to order and not owning the materials, are not "manufacturers"). Such potential taxpayers are, of course, difficult to reach. Otherwise, there is apparently no particular reason for difficulty with the jewelry tax. The tax has certain other marked disadvantages, however: It is levied on a durable article, and, under the present exemption, reaches only persons who could be taxed more readily under the income tax. Again (under the present exemption), the tax will probably yield not more than $2 million or $3 million. There seems no reason for retaining the tax in its present form, and it is not one of the more suitable excises for collection without exemptions.

                        Yield of Jewelry Tax
                       In millions of dollars

                   Note: Includes tax on watches,
                        clocks, glasses, etc.

           Fiscal year                         Yield

           1918                         2.4 (3 per cent tax)
           1919                         4.8 (3 per cent tax)
           1920                         25.9
           1924                         22.6
           1926                          9.7
           1926                          7.3
           1922                         19.5
           1922                         19.5
           1923                         20.3
           * * * *                      * * *
           1933                          3.1
           1934                          4.7

MAH-JONGG ETC. SETS. -- The Act of June 2, 1924, levied, and the Act of February 26, 1926 repealed, a 10 per cent tax on mah-jongg, pung chow, and similar table sets and component parts thereof, sold or leased by the producer or importer. The yield was $20 thousand in 1925 and $7 thousand in 1926.

MATCHES. -- The match tax, common in Europe and levied by the Federal Government during the Civil War, was not imposed during the World War period, and its first appearance in the Federal revenue system in recent decades /23/ was in the 1932 Revenue Act, which set a rate of 2 cents per 1,000 matches (1/2 of 1 cent per 1,000 paper matches in books) on sale by producer or importer. The 1934 Revenue Act, to meet a problem raised by competition from foreign matches, added a 5 cent tax (per 1,000) on fancy wooden matches and wooden matches having a stained, dyed, or colored stick or stem, packed in boxes or in bulk. The tax expires June 30, 1935.

The yield was $2.9 million in 1933 and $7.0 million in 1934.

The writer is not in a position to state in what manner, if at all, this type of tax at this rate is shifted, but it seems likely that at present rates none of it is shifted. Part of it may be passed on to retailers, but it is extremely doubtful whether any of it reaches consumers. If the tax is not shifted there is no justification for it. If it is shifted it becomes a tax on an article that to a considerable extent is a necessity (e. g. in cooking) and has the general advantages and disadvantages of such a tax. Smoker are already adequately reached under the tobacco taxes. It presents no difficult administrative problems at the moment. At a high rate -- say 20 to 30 cents a thousand -- it would probably cause a sharp decline in the tax base, as economies in the use of matches could and would be practised, and it would probably be necessary to levy a tax on lighters. The demand for matches at the present time is probably less inelastic than the demand of salt, for instance. On the whole, the tax does not appear suitable for use as a large source of revenue, but it does offer possibilities if need of funds should drive the Government in this direction.

PATENT MEDICINES. -- The tax on patent medicines is one of the few war-time excise that were not reenacted by the 1932 Revenue Act. Like the jewelry tax, it started life under the Act of October 3, 1917 as a tax on manufacturers or importers, and by the Act of February 24, 1919 was changed to a retail tax. The manufacturers' rate was 2 per cent; the retailer', 1 cent per 25 cent or fraction. Under the 1919 Act, exemption was granted to vaccines and bacterias not advertised to the lay public and to non-advertised medicines sold by physicians to their patients.

The 2 per cent tax yielded $1.8 million in 1918 and $3.6 million in 1919. Figures for the retail tax are lumped with those for the toilet articles tax, the totals being in millions of dollars: 1919, 1.5; 1920, 6.4; 1921, 5.8; 1922, 2.3. The tax was repealed by the 1921 Revenue Act.

The 1917 and 1919 laws, in levying the tax, went into some detail with respect to the nature of articles to be taxed, and the complexity of the problem can be grasped by reading the law. Aside from whatever sumptuary aspect may be involved, this tax must be rated low in the scale. The structure of the industry is such as to render collection comparatively difficult, and the distribution of the burden, if the basis unless the Government is to go on the assumption that ability to pay varies directly with gullibility and ignorance.

RADIO PARTS. RADIO-PHONOGRAPHS, RECORDS, PIANOS, ETC. -- Rapid changes in the technique of reproducing or transmitting music have been reflected in the changing tax laws. The Act of October 3, 1917 levied a 3 per cent tax on sales, by producers or importers, of piano-players, graphaphones, phonographs, talking machines, and records. The scope of the tax was extended by the Act of February 24, 1919 by adding pianos, organs (except pipe organs), and music boxes, and the rate was raised to 5 per cent. Repealed by the 1921 Revenue Act, the tax reappeared in a somewhat different form in the Revenue Act of 1932 as a levy on radio parts, phonographs mechanisms, and records -- again at a 5 per cent rate on sale by producer or importer. The tax expires June 30, 1935.

The only period of significant revenue yield was during the years 1920 ($13.7 million) and 1921 ($11.6 million). In 1933 the tax produced only $2.2 million, and in 1934 $3.2 million.

In administration, the tax has caused difficulty because of complexities involved in taxing radio parts instead of the finished product. If the present tax is to be retained, the complete radio set should also be taxed, and exemption granted to purchases of parts by radio manufacturers who use the parts in the production of a taxable article, as is done under the refrigerator tax. With such a low rate as now exists, however, the tax has little justification. As with so many of the present excises, the Government should decide whether the article in question is a suitable channel for transmitting a burden to the consumer, and, if it decides in the affirmative, it should levy a tax on manufacturers at a rate that would the equivalent of a retail rate of 5 or 10 per cent. The radio and the phonograph taxes probably represent as good a way of reaching the quasi-luxury element, especially among those not subject to income tax, as do the soft drinks and admissions taxes, and are easier of administration, consistent with equity, than the soft drinks tax.

REFRIGERATORS. -- The effect of invention upon revenue is shown by the tax on mechanical refrigerators, which was not available in the war period and was introduced by the Revenue Act of 1932 at a rate of 5 per cent of the producer's or importer's price. The tax is levied both on the completed unit and on the part thereof, with provisions to eliminate double taxation. The yield was $2.1 million in 1932, but jumped to $5.6 million the next year.

The validity of this tax, standing alone, as a luxury levy is doubtful because of the competitive element involved in connection with non-mechanical refrigerators. The mechanical type of refrigerator is no longer the exclusive possession of the wealthy, and, when its use in apartment houses is considered, it can be seen that, at least at a high rate, the tax is sure to be unduly discriminatory. At the present low rate it is perhaps not greatly objectionable, but neither is its yield important. No trouble is had in administering it, but the writer is not inclined to press for its extension beyond June 30, 1935 when it expires according to existing law.

SMOKING ACCESSORIES. -- The Act of February 24, 1919 levied a tax of 10 per cent on sales by producers or importers of: cigar or cigarette holders or pipes, made in part or entirely of meerschaum or amber; humidors; and smoking stands. The Act of June 2, 1924 abolished the tax on smoking stands, and the rest of the tax was ended by the Act of February 26, 1926. The tax yielded less $0.2 million a year.

SOFT DRINKS: -- GENERAL DESCRIPTION. "Even more than an admission tax a tax on soft drinks (for recent history, see section following) would seems at first sight an ideal way to tap, indirectly, the incomes of persons not subject to the income tax. The widespread habit of consumption of these beverages induces visions of high revenue yields, and the non-necessity feature of the expenditure obviates a burden upon the destitute and the near-destitute. Unfortunately, the structure of the producing and distributing branches of the soft drink trade renders quite difficult any thorough enforcement of a tax high enough to yield appreciable revenue. This is reflected (a) in the shifting policy of Congress from 1917 to date -- first levying the tax chiefly on the sale of the manufacturing ingredients, then switching to a series of taxes on the finished product (collected in large part at the retail stage), /24/ and finally returning to the earlier basis; (b) in the refusal to levy substantial rates except for the years 1919-21, when rates of 10 and 15 per cent were employed, and the repeal of the taxes by the 1934 Revenue Act. The peak yields of nearly $60 million in 1920 and 1921 (reflecting tax on certain non-beverages, including ice cream), contrast sharply with the figures of $10 million in 1923 and 1924, and $4 and $5 million in 1933 and 1934.

From an administrative standpoint, the soft drink business poses almost every difficulty conceivable under an indirect tax. If an attempt is made to collect the tax at the stage nearest the consumer, there are hundreds of thousands of small retail dealers to watch, and these dealers usually sell other things in addition to the taxed article. /25/ Collection of a tax on the finished product at the earliest possible stage is hampered by the facts that (a) the carbonated bottling business is split among producers most of whom operate on a capital of under $50,000, /26/ and whose number has been estimated at 14,000 (in 1921) /27/ and 7,000 (in 1934) /28/, and (b) many soft drinks are "manufactured" at the retail counter. A tax on the ingredients entering into soft drinks seems to offer less chance of evasion than either of the other two methods. However, in view of the wide variety of soft drink products and of the ingredients used therein, and the use of these ingredients for a vast number of other purposes, it is difficult to devise a series of taxes that does not discriminate unduly and does not cause undesirable changes in production technique; /29/ and, as the tax becomes so far removed from the consumer, shifting becomes more uncertain. Furthermore, there remain several difficult problems: still drinks (e.g. orangeade without soda water) have no ingredients that can be satisfactorily taxed; the carbonic acid gas tax, it is charged, has been evaded through purchase and liquefaction of " dry ice" by bottlers who fail to report this taxable "manufacturing" activity; and carbonic acid gas is now being sold to retailers for pressure (non-taxable) purposes, making it difficult to determine the exact amount taxable.