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Source: CENSUS OF MANUFACTURES, 1937, Part I

                               Table 4

   Salaries, wages and compensation of officers /1/; interest, /2/
     and net income /3/ as a percent of total compiled receipts
           for 30 selected public utility companies, 1934

--------------------------------------------------------------------
          Salaries, wages,              Net    Total salaries, etc.,
Company   and compensation   Interest  income      interest and     
             of officers                            net income      

--------------------------------------------------------------------
    Corporations with total compiled receipts under $10,000,000     

    1           10.07%        38.34%   23.07%          71.48%       
    2           22.91         26.85    13.40           63.16        
    3           17.82         18.51    13.42           49.75        
    4           29.18         15.89     1.74           46.81        
    5           24.36           .26    32.89           57.51        
    6           14.46         22.21     5.59           42.26        
    7           25.16         22.25    14.38           61.79        
    8           18.13         15.86    23.12           57.11        
    9           18.25         15.81    22.80           56.86        
   10           25.72         14.23     7.65           47.60        

Corporations with total compiled receipts of $10,000,000-$25,000,000

   11           25.40         27.47    17.62           70.49        
   12           20.39         24.58     6.06           51.03        
   13           13.64         31.63    10.04           55.31        
   14            8.50          5.93    33.43           47.86        
   15           20.84         20.96     7.70           49.50        
   16           18.61         21.38      .01           40.00        
   17            4.95          5.35    17.15           27.45        
   18           18.97         25.74    10.16           54.87        
   19           19.12         26.15    10.22           55.49        
   20           17.04         21.22    23.06           61.32        

 Corporations with total compiled receipts of $25,000,000 and over  

   21           19.49         19.70     8.59           47.78        
   22           25.75          9.84    20.12           55.71        
   23           18.88         10.89    17.32           47.09        
   24           23.88         15.96    25.14           64.98        
   25           21.93         21.62    17.40           60.95        
   26           21.57         10.32    13.34           45.23        
   27           12.98          6.00    29.23           48.21        
   28           25.70          8.54    20.16           54.40        
   29           18.07          9.47    32.28           59.82        
   30           19.29         12.66    34.89           66.84        
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                         FOOTNOTES TO TABLE

     Treasury Department, Division of Tax Research

     Source: Compiled from reports filed with the Federal Power      
             Commission (Financial Statistics, 1934)

     /1/ Including bonus or additional compensation and amounts
chargeable to capital account.

     /2/ Interest on long-term debt and other interest charges and
deductions (exclusive of amortization of bonds, discounts, expenses,
etc., and interest during construction credit).

     /3/ Net income after Federal income tax.

                          END OF FOOTNOTES

                               Table 5

Compensation of employees, interest accrued, and net income /1/ as a
 percent of total compiled receipts for all Class I steam railways,
        1929, 1932 and 1937; and for selected railways, 1937

---------------------------------------------------------------------
                                                        Compensation 
                                                        of employees 
                       Compensation  Interest    Net    plus interest
        Year           of employees  accrued   income    accrued and 
                                                         net income  
                                                         or deficit  

---------------------------------------------------------------------
                     All Class I steam railways                      

        1929              42.98        7.59     13.31       63.88    
        1932              44.18       15.32     -4.25       55.25    
        1937              44.92       11.11      2.22       58.25    

               Selected Class I steam railways - 1937                

Pennsylvania Railroad                                                
Company                   44.60        5.89      5.46       55.95    
New York Central                                                     
Railroad Company          46.94        6.82      1.60       55.36    
Southern Pacific                                                     
Company                   44.62        7.67      3.08       55.37    
Baltimore and Ohio                                                   
Railroad Company          44.28       17.28     -0.40       61.16    
Union Pacific                                                        
Railroad Company          38.32        8.03      9.97       56.32    
Atchison, Topeka &                                                   
Sante Fe Railway Co.      48.83        6.30      4.35       59.48    
Chesapeake and Ohio                                                  
Railway Company           34.50        7.14     26.38       68.02    
Southern Railway                                                     
Company                   47.06       13.38      0.79       61.23    
Great Northern                                                       
Railway Company           37.49       15.64     10.12       63.25    
Missouri Pacific                                                     
Railroad Company          44.95       21.90     -9.17       57.68    
Erie Railroad Company     46.61       14.52     -0.50       60.63    
Chicago, Rock Island                                                 
and Pacific                                                          
Railway Company           51.07       16.35    -12.74       54.68    
Northern Pacific                                                     
Railway Company           47.90       19.43      0.16       67.49    
Denver and Rio Grande                                                
Western Railroad Co.      59.12       20.70    -21.36       58.46    
Western Pacific                                                      
Railroad Company          47.34       19.27    -19.26       47.35    
---------------------------------------------------------------------
                         FOOTNOTES TO TABLE

     Treasury Department, Division of Tax Research

     Source: FIFTY-FIRST ANNUAL REPORT OF THE STATISTICS OF RAILWAYS 
             IN THE UNITED STATES FOR THE YEAR ENDING DECEMBER       
             31, 1937, Interstate Commerce Commission

     /1/ Net income after Federal income tax

                          END OF FOOTNOTES

APPENDIX A

GENERAL DESCRIPTION OF NET VALUE ADDED TAX ACCORDING TO ITS PROPONENTS

There appears to be general agreement among the several proponents of a tax on net value added that it be levied on producers of goods and services irrespective of the form of business organization. Thus the term "producers" would include corporations, partnerships, and sole proprietorships.

The discussion of proponents with respect to the tax base shows a variation in interpretation of the terms "net value added" or "net value product":

(a) Dr. Gerhard Colm has been the most consistent proponent, although his writings also contain variations. In 1935, he interpreted "value added by manufacturer" to include "the amount of wages plus debt service plus profit." However, he raised the question, without answering it, whether or not depreciation charges should be in or out of the tax base. /56/

In 1939, he indicated "value added by manufacturer" meant "the sum of wages, and interest and profits." This time he also stated that the tax base would be equitable to producers in all industries excepting "agriculture and possible also . . . a few branches of distribution and services." /57/

(b) Dr. Paul Studenski has stated that the tax on value added "would be imposed on each business enterprise as a given percentage of the entire payroll, plus interest, plus profits." /58/ In a subsequent article, however, he defined "value added by production" as "namely the total receipts of the business from sales, less the costs of the materials used in production." /59/ This interpretation of the tax base is essentially different from the previous one suggested before Congress. In a statement to the Treasury Department, Dr. Studenski used the terms "value added" and "net value product" synonymously and said:

"It can be described as the gross sales of a concern less
the costs of materials and services procured from other
enterprises and used in production. It represents the net value
of the labours of the establishment itself without any
admixtures of the labours of others and includes, in the main,
the costs of labor, management, and capital employed by the
enterprise, and the returns due to the entrepreneur as a reward
for his contribution to production." /60/

This statement is inconsistent when used to describe "net value product." In questioning Dr. Studenski, it was discovered that he was not sure whether interest paid should be in the tax base and that he did not think rents paid should be in the tax base. He did indicate, however, that the tax base would be somewhere between operating net income and statutory net income as determined under the corporation net income tax. /61/ These statements indicate that Dr. Studenski would want deductions for depreciation as well as materials used in production. Dr. Studenski also stated that:

" . . . The tax can be applied even to the smallest
business concerns whose accounting may be quite imperfect. For
every business, however small, has some record of its sales and
the invoices or bills of its purchases. The tax would be
susceptible of successful operation especially in the case of
the manufacturing, wholesaling, retailing, transportation and
mining businesses. It would not operate as well in the case of
agriculture and possibly the professions where the value added
consists mainly of the rewards of the entrepreneur, for their
own labors and of the interest payments on their mortgages or
other debts. It may be necessary to exclude these fields of
occupation from the operation of the tax." /62/

(c) Dr. Roscoe Arant has also been a proponent of the "net value product" tax, although for State use. He has stated that the "net value product" refers to "the net product or the net earnings of the business as a complete unit" and interpreted net earnings as "clothed with its economic rather than its accounting moaning." However, in discussing the tax base further, it appears clear that he does not understand "net value product" to mean what economists ordinarily define it to be but, rather, to mean gross sales less the cost of materials and supplies entering into the production of the goods and services sold. This is not a tax on "net value product" but merely a "modified gross income" tax following the proposal of several persons including Dr. T. S. Adams whom he quotes favorably. /63/

The distinction between a "modified gross income" tax and a tax on "net value added" is one which has not been distinguished clearly by other persons advocating or describing the "net value added" tax. /64/

APPENDIX B

SOME MOOT QUESTIONS RESPECTING DETERMINATION OF A NET VALUE ADDED TAX BASE

There are at least five independent methods of determining national income. Two of these methods are relevant to the determination of a net value added tax base. Thus it should be clear that the concept of net value added by industry in general is but one of several economic concepts of national income. That is, net value added may also be termed the income produced or the net value product of all industry during a given year. As a business tax, the tax on net value added should be levied on that part of the national income which originates with the taxpayer. Stated another way, net value added is the net value of the product DERIVED by the taxpayer from his business transactions.

In its simplest concept, net value added may be viewed as the selling value of each taxpayer's output less his purchases from other industries or enterprises. This is one of the relevant national income concepts. Barring exemptions, the summation of taxpayer tax bases presumably would result in a total value added by production equal to national income. However, because the scope of general business transactions is broader than merely "sales" and "purchases," the net value added tax base must necessarily be viewed as a composite of business payments and distributive shares. For example, there are the income items of rents and royalties received, and "other income" items such as cash discounts from purchases, refunds, and profit on installment sales which ordinarily are not accounted as income from sales. This is the second relevant national income concept. In this somewhat more complicated method the tax base would be made up of wages, salaries, interest paid by business enterprises, profits earned by enterprises, and net rents and royalties. The summation of these distributive shares would result in a total income distributed by and derived from business enterprises. From a tax base standpoint, the tax base under the former net value concept would always be smaller than the tax base under the latter concept.

These business payments and distributive shares are not to be viewed as necessarily representing the social value of the contributions of the respective factors of production. In short, net value added as a tax concept must be viewed as a special case or definition of social income. For example, the amount of taxes paid by a producer is not to be viewed as the correct value measurement of government's contribution to the net value product derived by that producer from his business transactions. Neither are the taxpayer's payments to government to be viewed as his measure of the value of government services received by him in deriving the net value product. This lack of relationship between tax as a price paid and social value received is not peculiar to business transactions involving government, for monopolistic prices and other transactions which are the result of imperfect market conditions also represent the imperfect relationship between price and value.

MOOT QUESTIONS RELATING TO GROSS INCOME AND DEDUCTIONS

Subsidies

Government subsidy payments might be viewed as an item of income in the determination of the tax base. M. A. Copeland views this as an item of income in determining national income and dismisses it with the mere statement, "This item is self-explanatory." /65/ For tax base purposes, however, government subsidy payments are not necessarily an open and shut case. It does seem peculiar for government to give enterprise subsidies on the one hand and subsequently include such payments as items of tax base on the other hand. Consequently, while subsidy payments may very well be conceived as income derived by business enterprise from business transactions and therefore as income produced justly allocated to the recipient industries for purposes of allocating national income by industry groups, such payments may very well be excluded from gross income for net value added tax base purposes.

Interest and Cash Dividends Received from Exempt Producers

Interest and cash dividends received generally would not enter as gross income items since interest and dividends paid are tax base items. For example, to include both interest received and interest paid would result in double taxation of interest. However, interest and dividends received from exempt producers could be considered as proper items of gross income. While this procedure has logical merit, it does not have a high degree of administrative practicability.

Bad Debts

Bad debts are allowed as a deduction on the theory that the distributive share base item "profits" would be overstated if "bad debts" are not allowed. From a social viewpoint, goods produced and sold represent value produced irrespective of whether the buyer fails to pay for the goods or not, but to the taxpayer a bad debt represents a real reduction in the amount of his "net value added."

Changes in Value of Inventories Due to Physical Changes in Inventory and Price Changes

To the economist concerned with national income, the increase in value of inventories is a proper item of income to the economy. /66/ However, this is not the viewpoint of business men, nor is it accepted accounting procedure. For tax purposes, it would probably be best to use the accountant's approach to the question.

Under present-day methods of accounting, a company normally arrives at "cost of goods sold" for the year by deducting the value of inventory at the end of the year from cost of purchases of materials during the year plus the opening inventory. Closing inventory is conceived of as an asset at the end of the year and part of "cost of goods sold" in the next year.

Under the tax, however, there is the question of taxable expenditures which do not enter into ordinary income tax accounting. Under the accountant's concept of income, wages and interest which are paid out in one year in order to produce goods not sold till a succeeding year should not be included in the net value added tax base until the year in which the goods are sold. Thus it is necessary to keep records or make estimates of the type of costs incurred in producing goods for inventory or work in process.

Several possible methods of accounting for inventories are shown in the attached examples.

CASE 1. In cases where the cost of production per unit and the selling price per unit are the same in two successive accounting periods a number of problems are encountered in applying a net value added tax if the normal accrual method of accounting is used.

The total cost of the inventory at the end of the year is removed from the profit and loss statement for the first year so as not to affect profits or costs. If some of the inventory at the end of the first year consists of goods in process, the situation is rather complex. In this case, it is necessary to determine the costs incurred by the work applied so far to these unfinished goods. An accurate record of such costs is impossible to obtain; consequently, the accountant may use a system of "standard costs." Such a system allocates overhead costs and direct costs between different products and to goods in different stages of production in what seems to be a fair manner. It is obvious, however, that if the estimated cost of the goods in process at the end of the year is overstated, profits for that year will be overstated; but in the next accounting period, when these goods are finished and sold, the "cost of goods sold" will be higher and profits lower. Thus, this error would cancel out. Another problem arises in the case where a mistake is made in estimating the cost of work in process. The tax base will be lowered in the first year because wages and interest allocated to work in process will be removed from the amount of such payments paid out or accrued and properly chargeable to goods produced and sold during the year. Then, too, the tax base will be incorrectly increased by the amount of depreciation and other deduction items charged to goods in process but properly allowable as a deduction from the sales of the year.

These mistakes of costing would however cancel out between the two years. The fictitious increase in profits in the first year, however, would not be canceled out in that year by the lowered amount of wages and interest in the tax base.

CASE 2. Since the net value added tax is based on certain expense items as well as net income, it might be considered proper to include in the tax base taxable expense items entering into the inventory produced during any year. Case 2 calculations show the effect of such a method upon the tax base in two years in which the cost and selling price per unit do not change.

This method would appear to be simpler than the ordinary accounting method in that all taxable elements of expenditures would be taxed when paid out and no estimate would have to be made as to how much should be carried over to the next year. But this simplicity is only apparent, since in order to get the profits on goods actually sold costs have to be allocated to inventory and work in process.

If costs properly charged to work in process were incorrectly estimated, somewhat the same situation would prevail as in Case 1. Too large a cost for work in process would increase profits in the first year and decrease them in the second, but no trouble would arise with regard to wages, salaries and interest as in Case 1 because they would all be taxable when actually paid. The administrative problem would be concerned with the accuracy of accrued tax credits for cost of goods sold in the current year for which taxes had been paid in a previous year.


                               CASE 1

         Tax base under a net value added tax if the regular
                accrual method of accounting is used

---------------------------------------------------------------
                                         Units  Price   Value  

---------------------------------------------------------------
                          FIRST YEAR                           
1.  Sales                                1,000   $ 12  $12,000 
2.  Cost of goods sold                                         
      a.  Salaries, wages, interest      1,000      5    5,000 
      b.  Materials and depreciation     1,000      5    5,000 
3.  Cost of goods produced during the                          
     year but not sold                                         
      a. Salaries, wages, interest         200      5    1,000 
      b. Materials and depreciation        200      5    1,000 
4.  Profit on sales (1 - 2)                              2,000 
5.  Tax base (2a + 4)                                    7,000 
6.  Tax base as a percent of sales                        58.3%

                         SECOND YEAR                           

1.  Sales                                1,000   $ 12  $12,000 
2.  Cost of goods sold and produced                            
     during the year                                           
      a.  Salaries, wages, interest        800      5    4,000 
      b.  Materials and depreciation       800      5    4,000 
3.  Cost of goods sold but not produced                        
     during the year                                           
      a.  Salaries, wages, interest        200      5    1,000 
      b.  Materials and depreciation       200      5    1,000 
4.  Profit on sales (1 - (2 + 3))                        2,000 
5.  Tax base (2a + 3a + 4)                               7,000 
6.  Tax base as a percent of sales                        58.3%

                 Assumptions - for both years                  

1.  Selling price per unit                       $ 12          
2.  Cost of production per unit                                
      a.  Salaries, wages, interest                 5          
      b.  Materials and depreciation                5          
---------------------------------------------------------------

                               CASE 2

   Tax base under a net value added tax if the cost of production
        of all goods produced in one year enters into the tax
                          base of that year

------------------------------------------------------------------
                                            Units  Price   Value  

------------------------------------------------------------------
                           FIRST YEAR                             
1.  Sales                                   1,000   $ 12  $12,000 
2.  Cost of goods sold                                            
      a.  Salaries, wages, interest         1,000      5    5,000 
      b.  Materials and depreciation        1,000      5    5,000 
3.  Cost of goods produced during the year                        
     but not sold                                                 
      a.  Salaries, wages, interest           200      5    1,000 
      b.  Materials and depreciation          200      5    1,000 
4.  Profit on sales (1 - 2)                                 2,000 
5.  Tax base (2a + 3a + 4)                                  8,000 
6.  Tax base as a percent of sales                           66.7%

                           SECOND YEAR                            

1.  Sales                                   1,000   $ 12  $12,000 
2.  Cost of goods sold and produced                               
     during the year                                              
      a.  Salaries, wages, interest           800      5    4,000 
      b.  Materials and depreciation          800      5    4,000 
3.  Cost of goods sold but not produced                           
     during the year                                              
      a.  Salaries, wages, interest           200      5    1,000 
      b.  Materials and depreciation          200      5    1,000 
4.  Profit on sales (1 - (2 + 3))                           2,000 
5.  Tax base (2a + 4)                                       6,000 
6.  Tax base as a percent of sales                           50.0%

                  Assumptions - for both years                    

1.  Selling price per unit                          $ 12          
2.  Cost of production per unit                                   
      a.  Salaries, wages, interest                    5          
      b.  Materials and depreciation                   5          
------------------------------------------------------------------

CASE 3. If the economists' concept of income were used, an increase in inventory during an accounting period would be considered as an addition to gross revenues for the period. The net income would be derived by subtracting from this sum all costs incurred in the period. /67/ Case 3 calculations have been designed to show the effect of this method upon the tax base where costs and selling prices do not change between the two periods in question. In this case, the inventory is valued at its selling price.

This total tax base is no larger for the two years together than in Case 1 or Case 2, but a larger part of the tax would be paid in the first accounting period. In the second year, where less goods are produced than are sold, the tax base would consist only of the profits made and salaries, wages and interest paid on goods produced during that year. However, there is the problem of the expected profit on goods in process. It could be provided that no profit should be added to their valuation and that all profit should be taken up when the goods were finished. A profit figure might be provided to be allocated on the basis of the percentage completion of the work in process.

It should be readily apparent that any attempt to write in an expected profit to inventory and work in process would be fraught with difficulty.

The discussion with reference to the cost of goods in process given for Case 2 is applicable here.

CASE 4. Suppose that selling prices decline in the second year but costs are also reduced so that the same margin of net profit is earned on the selling price of each unit produced. If all goods were produced and sold in separate periods and all costs bore the same relation to total costs in both periods, then the net value added tax would be the same percent of sales in both periods.

Under regular accounting methods where the inventory of one year enters into "cost of goods sold" in the next year, a loss or decreased profit is incurred where prices decline in the year in which the inventory is produced. In this case the merchant or manufacturer can, at present, value his inventory at market at the end of the first year and take a loss in the form of lowered net income. /68/ The approved accounting method is to set up the inventory at cost and take the loss by means of a valuation reserve closed out to profit and loss. /69/


                               CASE 3

        Tax base under a net value added tax if the expected
        profit on goods produced for inventory during a year
              is included in the tax base of that year

--------------------------------------------------------------
                                        Units  Price   Value  

--------------------------------------------------------------
                         FIRST YEAR                           

1.  Sales                               1,000   $ 12  $12,000 
2.  Cost of goods sold                                        
      a.  Salaries, wages, interest     1,000      5    5,000 
      b.  Materials and depreciation    1,000      5    5,000 
3.  Market value of goods produced                            
     during the year but not sold         200     12    2,400 
4.  Cost of goods produced during the                         
     year but not sold                                        
      a.  Salaries, wages, interest       200      5    1,000 
      b.  Materials and depreciation      200      5    1,000 
5.  Sales plus market value of                                
     inventory (1 + 3)                                 14,400 
6.  Profit on sales plus inventory                            
     ( (1 + 3) - (2+ 4) )                               2,400 
7.  Tax base (2a + 4a + 6)                              8,400 
8.  Tax base as a percent of sales                       70.0%

                         SECOND YEAR                          

1.  Sales                               1,000   $ 12  $12,000 
2.  Cost of goods sold and produced                           
     during the year                                          
      a.  Salaries, wages, interest       800      5    4,000 
      b.  Materials and depreciation      800      5    4,000 
3.  Market value of goods sold but not                        
     produced during the year             200     12    2,400 
4.  Profit on goods produced and sold                         
     during the year                                    1,600 
5.  Tax base (2a + 4)                                   5,600 
6.  Tax base as a percent of sales                       46.7%

                Assumptions - for both years                  

1.  Selling price per unit                      $ 12          
2.  Cost of production per unit                               
      a.  Salaries, wages, interest                5          
      b.  Materials and depreciation               5          
--------------------------------------------------------------

The same method could be used to take such losses under a net value added tax but some special provision has to be made with regard to taxable expense items. If the inventory is brought onto the books in the second period at its market value, some portion of the wages, salaries and interest actually paid to produce these articles would escape the tax. Therefore, it must be provided that a record must be kept of actual expenses of inventory and that These be entered in the tax base rather than the written-down costs. The whole problem can be simplified, of course, by preventing the use of the "cost of market" valuation method.

The example for Case 4 was prepared on the basis of the use of a valuation reserve. Note that though sales are lower in the second year, the tax base is a larger percent of sales than in the first year.

Valuation Readjustment Gains and Losses Other Than Inventories

This item is either (a) income from the sale of assets at prices higher than the book cost of income from the purchase of liabilities at prices lower than the book cost, or (b) an adjustment in the book value of assets or liabilities. These items often appear as bookkeeping transactions affecting corporate surplus accounts. They may or may not be included in the net value added tax base. This item can be eliminated without affecting the net value added tax base in a fundamental manner. A good deal of such changes is necessarily attributable to previous years' operations and some changes may represent someone's judgment rather than a realized gain or loss.

Pensions and Compensation for Injuries

Pensions are not allowed as deductions and compensation payments for injuries also are not allowed as deductions. Pensions are viewed as accrued compensation of employees. Compensation for injury is an anomalous item; that is, by not allowing it as a deduction, it appears in the tax base as a component of net value added. Obviously, no net value is added to the sum total of production through injury. If labor were capitalized even as machinery, then compensation for injuries would be allowed as a deduction on the same theory as depreciation. However, this is not the case and experts in estimating national income allow compensation payments for injuries as a component item of national income, although they recognize the anomaly. /70/

Losses by Fire, Storm, Shipwreck, Etc.

These are losses above insurance and are allowed on the theory of quick depreciation.

Damages paid to persons for property damage as distinct from damages paid to individuals for personal injury may be allowed as deductions on the same theory as the allowance of losses by fire, storms, shipwreck, etc.

CASE 4


     Tax base under a net value added tax in cases where market
      value of inventory is below cost and the regular accrual
                    method of accounting is used

------------------------------------------------------------------
                                            Units  Price   Value  

------------------------------------------------------------------
                           FIRST YEAR                             

1.  Sales                                   1,000   $ 12  $12,000 
2.  Cost of goods sold                                            
      a.  Salaries, wages, interest         1,000      5    5,000 
      b.  Materials and depreciation        1,000      5    5,000 
3.  Cost of goods produced during the year                        
     but not sold                                                 
      a.  Salaries, wages, interest           200      5    1,000 
      b.  Materials and depreciation          200      5    1,000 
4.  Market value of inventory                                     
      a.  Salaries, wages, interest           200      4      800 
      b.  Materials and depreciation          200      4      800 
5.  Inventory adjustment (debit)              200      2      400 
6.  Profit on sales (1 - 2)                                 2,000 
7.  Loss on inventory                                         400 
8.  Tax base (2a + 6 - 7)                                   6,600 
9.  Tax base as percent of sales                             55.0%

                           Second year                            

1.  Sales                                   1,000    $ 8  $ 8,000 
2.  Cost of goods produced and sold                               
     during the year                                              
      a.  Salaries, wages, interest           800   3.33    2,664 
      b.  Materials and depreciation          800   3.33    2,664 
3.  Cost of goods sold but not produced                           
     during the year                                              
      a.  Salaries, wages, interest           200      5    1,000 
      b.  Materials and depreciation          200      5    1,000 
4.  Book valuation of goods sold but not                          
     produced during the year                                     
      a.  Salaries, wages, interest           200      4      800 
      b.  Materials, and depreciation         200      4      800 
5.  Profit on sales (1 - (2 \m?\ 4))                        1,072 
6.  Tax base (2a + 3a + 5)                                  4,736 
7.  Tax base as a percent of sales                           59.2%
------------------------------------------------------------------

---------------------------------------------------------------
               Assumptions              FIRST YEAR  SECOND YEAR

---------------------------------------------------------------
1.  Selling price per unit                  $ 12        $ 8    
2.  Cost of product per unit                                   
      a.  Salaries, wages, interest            5          3.33 
      b.  Materials and depreciation           5          3.33 
3.  Profit per unit (percent) on goods                         
     produced and sold during the same                         
     year                                   16-2/3       16-2/3
---------------------------------------------------------------

Taxes, Not Including Employees' and Employers' Contributions to Social Security Taxes, and Corporate Net Income and Excess Profits Taxes

Since unemployment compensation paid by government will not be taxed, employees' payroll taxes should be in the tax base. If employers' contributions to private pension funds or pension payments are viewed as transfer items and are not allowed as deductions, employers' payroll taxes should not be allowed as deductions.

Taxes such as licenses, fees, and special assessments may be viewed as a special case of purchases of materials and supplies and services. /71/ The Declared Value Excess Profits Tax can also be included in this category, since it is a special type of capital stock tax. Capital stock taxes usually are considered as charges for the franchise giving one the right to engage in business.

Taxes on real property, customs, excises, and sales taxes may also be deducted as payments to government for services rendered. As was mentioned at the beginning of this Appendix, such payments should not be viewed as the measure of the value of government services received by the taxpayer any more than the price paid for a monopolistically controlled article measures its social value.

In measuring the national income produced in any period, some students of national income consider non-income taxes as deductions from income produced by business and as part of the income produced by government. /72/ Since the net value added tax attempts to tax the additional net value product of industry due to the existence of a favorable business framework maintained by government, it probably is more reasonable to allow taxes as deductions on the basis of payments already made to government for generally favorable services available to business than to include such taxes in the base.

Furthermore, it does not seem likely that Congress or business would view a tax already paid to government as rightfully part of the tax base of another tax.

The imposition of property, customs or sales taxes, etc., irrespective of whether the taxes are allowed as a deduction for purpose of the net value added tax, would affect the net value added tax base differently for different producers depending upon whether the taxes are shifted or not. This can be seen from the following example.

 
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