Estimates of a tax base to which a manufacturers' sales tax might apply have been made recently by the Section of Financial and Economic Research of the Treasury Department and by the writer of this memorandum. The two sets of estimates were made in different ways and independently, and do not apply to the same year; nevertheless, it is instructive to compare them.

The Section's estimates, made December 22, 1933, apply to 1934 and 1935. Certain assumptions are made with respect to the degree of industrial activity and price levels in those years, and the gross value of manufactures is estimated on this basis. The writer's estimates are for a year comparable in activity and price levels to 1931. The gross value of manufactures in 1931 ($41.3 billion) was only 5 percent more than that assumed by the Section for 1934 ($39.4 billion). Hence the Section's 1934 estimates can be profitably compared whit the writer's estimates.

Assuming that no exemptions of importance exist, except with respect to sales to State and local Governments and exports, and that no raw products of mines and no electrical energy are taxed, the base estimated by the Section is about /1/ $24 billion; by the writer, $29 billion, with a minimum of $24 billion and a maximum of $34 billion. Adjusting for the 5 percent difference noted above, the estimates are $4 billion apart.


/1/ Citations of all except the tax base of $17.4 billion do not, strictly, represent the Section's own figures. The Section's final estimate was for one type of tax only, and certain general adjustments (e.g. imports and exports; sales to Governments) are made AFTER inclusion of coal, etc., and deduction of food, etc. The writer, in comparing estimates on other types of sales tax, is extracting from the Section's estimate sheet certain unadjusted figures used to build up the final estimate. However, the error involved is not enough to invalidate the comparison.


If food is exempted, the base estimated by the Section if $19 billion, and by the writer $22 billion (with a minimum of $17 billion and a maximum of $26 billion). If clothing also is exempted, the base is $16 billion (Section), or $17 billion (writer) with a minimum of $13 billion and a maximum of $22 billion.

The Section (but not the writer) has estimated the yield of a tax that includes in its base sales for domestic and commercial consumption of coal, natural gas, and electrical energy, and sales of sand and gravel. These elements add about $1 billion to the tax base, and, assuming exemption of food, clothing, and State and local purchases. /1/ the total net tax base is put at $17 billion for 1934 and (assuming a gross value of manufactures of $47.5 billion) at $21 billion for 1935.

In terms of a tax of 1 percent, the estimates indicate that for a year roughly comparable with 1931, a manufacturers' sales tax should yield from $240 million to $290 million dollars. If food is exempt, the yield should be between $190 million and $220 million. If both food and clothing are exempt, the range drops to $160-$170 million. Inclusion of coal, etc., as noted above, would add about $10 million to the tax yield.

In general, the writer suggests that preference be given to the Section's estimates; he submits his own figures as being of possible interest with respect to maxima and minima and the fairly close agreement of the two sets of estimates in several instances.


/1/ Exemption of State and local purchases is assumed in all the estimates in this memorandum.


It should be noted that these estimates allow nothing for cost of administration and evasion. It is the writer's belief that, if about $10 million were made available for enforcement (i.e. about 3 percent of the yield of a no-exemption tax at a 1 percent rate), there would be no serious loss from evasion.

All of the above estimates assume that only finished products are taxed. The writer (but not the Section) has also made some rough estimates of the tax base for a manufacturers, sales tax that would reach all products of all manufacturers, including those that serve as materials, parts, etc., for further manufacture. With no exemptions, the estimate (again for a "1931" year) is $40 billion; with food exempt, $32 billion with food and clothing exempt, $26 billion.

Finally, the writer has attempted to estimate the base of a general sales tax -- i.e. one applying to all sales by all extractors, manufacturers, wholesalers, and retailers. AS this is written, time has not permitted a careful estimate, but indications are that the tax base would be somewhere in the range of from $80- $100 billion.

The methods used by the writer in arriving at his estimates will be found in an appendix to this memorandum.


To those in search of a "stable" tax base the manufacturers' sales tax offers far more than either the personal or corporation income tax as they existed under the Revenue Act of 1928, but far less than the tobacco tax. /1/ If the tax base reflecting calendar year 1929 conditions is taken as 100, the corresponding figure for 1931 is estimated by the writer at between 23 and 27 for the personal income tax, at between 31 and 34 for the corporation income tax, at 59 for a manufacturers, sales tax, and at 94 for the tobacco tax. For 1933 the figures are, corporation tax, 25; manufacturers, sales tax, 50; tobacco tax, 97 (data for individual income tax not estimated). The estimates are recapitulated in the accompanying table, and the methods used in deriving them are explained in an Appendix to this memorandum.

A retailers' sales tax would not have fared much better than one on manufacturers. The base for this type of tax declined from 100 in 1929 to 52 in 1933.

The only experience with a major type of sales tax in this country throughout the recent depression has been in West Virginia. The "gross income" tax there showed a decline in yield, with rates and scope of law unchanged, from $3,657 in the fiscal year ending June 30, 1929, to $1,605 in the year ending June 30, 1933. /2/ With the yield


/1/ Over a period of, say, five years or more; the tobacco tax is not very "stable" as long as the present upward secular trend continues.

/2/ Robert Murray Haig, Carl Shoup, and others, The Sales Tax in the American States, New York, 1934, p. 224.


of the fiscal year 1929 as 100, the yield for 1931 was 84, and that for 1933, 44. West Virginia's for administration of the tax probably accentuated the fall in receipts. /1/ That part of the tax yield coming from manufacturers declined from a base of 100 for 1929 to 78 for 1931 and 41 for 1933.


/1/ Haig, Shoup, and others, op. cat,. pp. 221-23.


BASE 1929 = 100

Note: Figures are for tax collected on income or sales of calendar year given

1929 1931 1933 Corporation Income Tax (a) Bureau of Internal Revenue Reports 100 34 25 (b) Statistics of Income 100 31 /b/ Individual Income Tax (a) Bureau of Internal Revenue Reports 100 27 /c/ (b) Statistics of Income 100 23 /b/ /c/

Tobacco Taxes 100 94 97



/a/ For method of arriving at indices for income taxes and tobacco taxes, see Appendix. Manufacturers' sales tax indices represent value of products as given by CENSUS OF MANUFACTURES: 1929, $70.43 billion; 1931, $41.35 billion; 1933 estimated on basis of incomplete returns available Aug. 20, 1934 $34.73 billion. A better method of comparison, though probably not yielding substantially different results, would be to compute for 1929 a net base in a manner similar to that for 1931, and to estimate the 1933 figure on the same basis. Retail indices represent total retail sales as reported by Census Bureau (Release of Aug. 7, 1934).

/b/ Data not available.

/c/ Extensive changes in rates and scope of law make comparison with 1929 impracticable for the writer to attempt at this time.



If a manufacturers' sales tax is to be levied, certain important questions arise that must be answered before the precise scope of the tax can be determined. Those to be considered in this section concern (a) definition of "manufacturing," (b) avoidance of "double taxation" or "pyramiding," and (c) sales to non-taxable persons or firms.

DEFINITION OF "MANUFACTURING." -- A manufacturers' sales tax should define as clearly as possible what is meant by manufacturing. The solution is not to be found merely in adding a string of synonyms after the word "manufacturing"; perhaps the best way is to discover the more important borderline cases and mention them specifically in the law. Examples of such cases are: newspaper, periodical, and book publishers, with respect to receipts both from sale of copies and sale of advertising space; retailers who assemble or mix materials to produce a finished product such as soft drinks, or food served in restaurants; farmers who partially process their own products, as in separating cream from milk or in making butter; mining enterprises that carry through certain preliminary operations such as breaking, sifting, etc.; fishing enterprises; and custom trade cutters, assemblers, etc., such as custom tailors, who work whit raw materials supplied by the ultimate consumer. Further remarks on this point can be of little value until a decision is made on the general type of sales tax desired.

AVOIDANCE OF "DOUBLE TAXATION" OR "PYRAMIDING." -- If manufacturer A, who produces ammunition, is subject to tax under a manufacturers' sales tax, there should not, so the argument runs, be any tax levied on the sales to him of lead, copper, explosive powder, and other materials entering into the ammunition. Otherwise the finished article, ammunition, is taxed twice. This reasoning is embodied in the present Federal law imposing manufacturers' excise taxes. Section 620 of the 1932 Revenue Act says that "no tax under this title shall be imposed upon any article . . . sold for use as MATERIAL in the manufacture or production of, or for use as COMPONENT PART OF," an article taxed under the same title of the law. /1/ Further examples may be found in the sales tax laws of many of the States of the United States, where the principle is applied in a somewhat different manner to distinguish between sales for use or consumption (which are taxable) and sales for resale (exempt, or taxable at a lower rate).

The argument as thus far presented, however, stops short of its logical goal. To illustrate: If ammunition manufacturer buys coal to heat his plant, or a lathe for use in producing the ammunition, the sales of these things to him are not under the philosophy embodied in the present manufacturers' excises, considered fit subjects for exemption. The reason usually implied for this attitude seems to be that the coal and the lathe are not "resold," at least as material parts of the article. The fallacy of this reasoning from an economic point of view is evident. The coal and the lathe are as truly "resold" (bit by bit) as the lead or the copper. To take the other point of view leads to gross discrimination against certain types of producers; a firm whose expenses were chiefly in equipment and supplies would bear a much heavier total tax burden than a firm whose gross sales were the same but whose expenses were chiefly in materials.


/1/ Italics mine.


There are at least two ways of meeting this problem: (a) by exempting from taxation any purchase that the taxpayer can treat as a business expense under the income tax law; (b) by allowing no exemption at all.

The first method is the more equitable, but the administrative difficulties might prove too great. Further consideration by administrative officials should be given to this point before any decision is made.

The Canadian sales tax operates on approximately this principle. Exemption is given to sales, not only of goods "used in, wrought into, or attached to articles to be manufactured or produced for sale," but also of "articles and materials, not to include permanent equipment, which enter into the cost of manufacture or production of goods manufactured or produced by a licensed manufacturer or producer. /1/ There seems to be little or no justification, however, for making an exception of permanent equipment. H.R. 10236 of March 8, 1932 contained a sales tax (defeated) that exempted articles "used in, wrought into, attached to or used as a covering or container for, an article to be manufactured . . . for sale . . . subject to tax," and articles "consumed in the process of manufacturing or producing such an article," not including, however, -- again, somewhat like the Canadian Act -- "plant equipment, machinery, and tools" (Section 617 (f)).


/1/ Special War Revenue Act, as amended, 1931, Nos. 85 (c) and 86 (2) (b), (c), (f), and Schedule AYE.


The second method is decidedly inequitable compared to the first, but it is probably not more inequitable than the conventional plan, which would exempt purchases of materials but not purchases of supplies and equipment. The strongest argument for adopting the conventional plan as opposed to (b) above is that manufacturers might be more apt to produce their own materials (especially semi-finished goods such as automobile bodies and finished goods such as windshield wipers) in order to escape taxation under (b) than they would be to produce their own supplies or equipment (e.g. coal, lathes, etc.). The writer concedes there is some force to this argument if the tax rate is high (say 5 percent). One way meeting this a attempt to avoid the tax under (b) would be to tax transfers within a given plant or, more likely, between different plants of the same enterprise. This has been tried in some of the European countries levying general sales taxes, and is in force today in at least one law, that of Czechoslovakia. /1/ The writer has no information on the effectiveness of this provision.

On the whole, it would seem best to give method (a) above a fair trial, and, if it proved impracticable, to use (b) unless the tax rate was 3 percent or more, when the conventional method -- exempting purchases of materials only -- could be employed.

A substitute sometimes urged for a manufacturers' sales tax is a


/1/ Bulletin de Statistique et de Legislation Comparee. Feb., 1933, p. 347.


tax on "value added by manufacture." As defined by the 1931 Census, "value added" is value of products less cost of materials, containers, fuel, and purchased electrical energy. It has been said that this plan would reach the same result as a tax on the final product with exemption granted to sales of materials to manufacturers (the conventional plan, noted above. /1/ This would be true only if (a) the "value added" tax applied not only to manufacturers but also to raw material producers; or (b) "value added" were so defined as to include amounts spent for purchases of exempt raw materials. Suppose that farmer A sells wheat for $100 to miller B, who "adds value" of $200 and sells his flour to baker C for $300, who "adds value" of $400 and sells to retailer D for $700. Under the conventional plan, tax would be paid on $700 (C's sale to D). Under the "value added" plan. tax would be paid on $200, $400, or $600.

The "value added" plan furthermore contains the inequities of the conventional plan in taxing materials and equipment used by manufacturer. This feature could, of course, be eliminated by defining "value added" in such a way that it would represent only expenditures for things that themselves were not subject to the tax in any way -- chiefly labor, interest and profit, depreciation on real estate and intangibles, and current expenses for intangibles (e.g. advertising expense).

The advantage of the "value added" tax would be the elimination of the system of licensing, or some similar system such as that employed


/1/ This subject is discussed in a memorandum of May 13, 1932, by Mr. Turney, on Senator Reed's proposal, Treasury files.


under the present excise taxes, required under conventional plan, and (if this is a advantage) a relatively light tax burden on those finished products carrying a heavy charge for the products of farm, mine, and fishery that they contain. Its chief disadvantages would be the relative difficulty of ascertaining value added, the necessity of making allowance for beginning and closing inventories, the larger number of taxpayers to be controlled for a given amount of revenue, and the impossibility of billing the tax separately on each sale. /1/

Finally, it may be noted that one of the objections frequently made to sales tax involving double taxation in the sense discussed in this section is that "pyramiding" of the tax would result. The term "pyramiding" is used loosely but seems to mean, in general, that, because business men are in the habit of adding a fixed percentage to their materials cost to allow for profit, they will make a profit on the tax shifted to them by their vendors. This argument has less force with respect to manufacturers than wholesalers or retailers, and any case the writer has not been impressed by this line of reasoning. If competition is active, the percentage added must change; if competition is not active, the monopolist or quasi- monopolist is presumably getting all he can from his vendees before the tax is levied. Over a short period, however, and within narrow limits, "pyramiding" of relatively unimportant amount may exist.

SALES TO NON-TAXABLE PERSONS OR FIRMS. -- Somewhat analogous to the problem just discussed is that concerning manufactured products


/1/ For some of these points the writer is indebted to Mr. Turney's memorandum.