A. Value Added

This industry produced /113/ income valued at $863 millions in 1939.

The Department of Commerce considers that all of the communication business is done by corporate units. /114/ In STATISTICS OF INCOME, communication corporations are included under "Transportation and Other Public Utilities," but the size distribution data for the broader classification may not be representative of the communication industry which is dominated by large units such as the Bell System, Western Union, and Postal Telegraph. Therefore, it was assumed that none of the "net value added" would have been removed from the 1939 tax base by the administrative exemption under consideration.

B. Number of Units

In 1937, there were 3,033 telephone and telegraph corporations, /115/ which, since the Department of Commerce considers all communication to be done by corporations, should have represented the number of business units in this industry. /116/ But examination of the Census of Electrical Industries for 1937 showed that there were thousands of units in the communication line. This Census reported that there were the following systems or companies in 1937; /117/ 50,560 telephone companies, 27 radiotelephone companies, 23 telegraph systems, /118/ and 98 radiotelegraph systems, /119/ or a total of 50,708 companies.

Many of the 50,560 telephone companies were very small, for only 846 of them had incomes in excess of $10,000; /120/ so that it is quite likely that not over 800 of them had receipts of more than $20,000. On the assumption that the telegraph, radiotelephone and radiotelegraph companies all received more than $20,000, a total of 948 companies could be considered as being large enough to be taxable in 1937. In all probability, the number would not have been much different in 1939.

The large number of small companies in the telephone business probably does not alter the conclusion in section (a) as to the amount of value added produced by companies with incomes of less than $20,000. In 1937, all telephone companies had operating revenues of $1,180,028,372 but only $12,586,776 of this was earned by the 49,714 companies with incomes of less than $10,000. /121/ The income produced by these small concerns may not have been included in the Department of Commerce estimates.


A. Value Added

The latest material showing the distribution of trading establishments by size of sales is that given by the Census of Business for 1935.

A study of two of the twenty-nine types of wholesale establishments showed that 4.9 percent of the sales were made by establishments doing less than $50,000 worth of business per annum. /122/ These establishments accounted for about 45 percent of the number and 35 percent of the sales of all wholesalers. It was assumed that this sample was representative of all wholesale establishments, so that it appeared likely that 3.5 percent of the sales by wholesalers were made by units with sales of less than $20,000 per annum.

For the same year, a distribution of independent retail stores showed that 29.0 percent of sales were made by units doing less than $20,000 worth of business. /123/ Included in this compilation of independent stores were some chains and state liquor stores but their presence did not weight the figures unduly.

In 1935, total sales by retailers and wholesalers amounted to about $76 billions, of which some $43 billions were made by wholesalers, /124/ $24 billions by independent retailers and $9 billions by chain stores, mail order houses and other miscellaneous retail stores. /125/ It was assumed that all chain store and mail order business was done by units with sales of more than $20,000 per annum and that the sales of the other two types were divided above and below the $20,000 line, as mentioned in the preceding paragraph, so that about 10 percent of the total sales in 1935 were made by units which sold less than $20,000 per annum.

Such a size distribution, if it were the same in 1939 as in 1935, would have decreased the taxable "net value added" by trade from $9,135 millions /126/ to $8,222 millions. Since the Census Bureau's data on "trade" (also for "manufacturing") are reported on the basis of stores or establishments rather than legal entities, the estimated amount of business likely to have been exempt from a "net value added" tax is too large if the exemption were made on the basis of a company's sales rather than sales by establishments or stores. Of course, a good deal of the necessary adjustment was made by considering as taxable all sales by chain stores and mail order houses.

B. Number of Units

In 1939, there were 201,781 wholesale establishments /127/ and 1,770,904 retail stores /128/ or a total of 1,972,685 establishments. The number of firms was somewhat less than this but the number of business units was still quite large because of the multitude of small retail stores. Federal income tax returns filed in 1937 and 1938 disclosed the existence of some 270,000 trading firms classified as follows: 143,084 corporations transacting business in 1937, /129/ 92,507 partnerships in 1936, /130/ and 35,563 sole proprietorships who had net incomes from all sources of over $5,000 in 1937. /131/ Many sole proprietors were obviously not included in these data. Even considering the fact that (a) 6,079 retail chains (in 1935) controlled 139,810 stores, /132/ (b) many other retail companies which were classed as independents had as many as three retail stores, /132/ and (c) the 176,756 wholesale establishments (in 1935) represented 125,032 organizations of separate ownership, /133/ there still must have been about 1,500,000 firms in 1939 in the trading category. However, the estimated number of taxpayers was made on the basis of stores and establishments rather than firms.

The material on the distribution of "wholesale merchants and industrial distributors" and independent retail stores by size of sales in 1935 /134/ was used to represent the distribution of the sales of all wholesalers and independent retail stores for 1939. On the basis of this distribution, there might have been about 284,000 independent retail stores and 131,000 wholesale establishments with sales of more than $20,000 in 1939. In addition, all chain stores, mail order houses, and other types of retail stores approximating 193,000 establishments might not have been exempt or a total of about 608,000 establishments with gross sales of $20,000 or more in 1939.

These figures were obtained as follows: From the distribution of "wholesale merchants and industrial distributors" it was estimated that 35 percent of the wholesale establishments had sales of less than $20,000 per year, and independent retail stores in 1939 were assumed to have made up the same percentage of all retail stores as in 1935, or 89.13 percent. /135/ All retail chain stores and other nonindependent retail establishments were assumed to be in the taxable group, but on the basis of the 1935 distribution of retail stores by size of sales, /136/ only 18 percent of the independent retail stores were so classified.


A. Value Added

Financial institutions are estimated to have produced income valued at $5,983 millions in 1939. /137/

It did not seem possible to give any approximation of how much of this sum would be removed from the tax base because it was the product of small business firms. The total receipts or disbursements of a bank or insurance company have no value as a guide to the tax base because so much of the flow of funds is composed of amounts taxed when disbursed by other business units. Financial institutions require a special study.

B. Number of Units

STATISTICS OF INCOME lists 117,079 corporations as being in the financial category in 1937. /138/ In 1936, 25,438 partnerships filed returns as financial firms, /139/ while in 1937 there were 8,763 sole proprietors in this classification with net incomes of $5,000 or more from all sources. /140/

For the year 1935, the Census Bureau made a tabulation of financial institutions and banks, which revealed the existence of 19,581 banks and 24,520 other financial institutions. /141/ Unfortunately the census was incomplete with respect to financial institutions other than banks. /142/ Another census for 1935 tabulated 35,057 insurance offices and 21,567 combined insurance and real estate offices /143/ but the coverage of this census was also incomplete.

On the basis of this 1935 data and the 1937 income tax returns, it seemed likely that there were at least 150,000 business firms classifiable under "finance" in 1939. Many of the agencies covered by the 1935 Census were incorporated, but a good many insurance agents, pawnbrokers, real estate agents, and stockbrokers were not.

No data exist which would enable one to judge the distribution of these financial firms by size of income.


a. Value Added

Service is reported to have produced, in 1939, income worth some $8,374 millions. /144/ Part of this income was attributable to domestic service which would not have been taxable. In 1934, the last year for which such data were shown, income produced by domestic service equaled about 17 percent of the total income produced in the service field. /145/ If the same proportion were attributable to domestic service in 1939, about $6,950 millions would have been left in the tax base of the service establishments. But a large percentage of this $7 billions was produced by businesses having a small income, as well as churches, medical and educational institutions, etc. In all likelihood the income produced by churches, hospitals, etc., would not be taxed, but the proportion of the income produced by these institutions could not be estimated. However, estimates were made of the proportion of the income produced by firms doing less than $20,000 worth of business yearly.

A Census of Service Establishments for 1935 showed that 32.6 percent of the receipts were earned by establishments doing over $25,000 business per annum, /146/ but the coverage of the census was incomplete because it did not cover a number of fields such as hotels, advertising agencies, and most important, the professional field. This census also enumerated establishments rather than business firms.

For lack of better material, it was assumed that 60 percent of the remaining $6,950 millions of income produced by service was produced by businesses with receipts of less than $20,000 a year. The inclusion of 40 percent of the units in the taxable group was based on the necessity of taking account of the fact that the 32.6 percent figure mentioned in the paragraph above applied to establishments with receipts of more than $25,000. However, this estimate of the number of establishments in the taxable group may be overgenerous. A 60 percent exemption would have lowered the 1939 taxable base to some $2,780 millions.

B. Number of Units

When attempting to determine the number of business units in this field, income tax data were of little value. For 1937, only 60,208 service corporations filed returns /147/ and 61,369 persons with net income of $5,000 or more from all sources reported as sole proprietors of professional businesses. /148/ For 1936, there were 39,191 partnerships classified under service. /149/ These income tax returns totaled about 161,000 so that these figures obviously were inadequate to give a picture of the business units in this field if one wished to include individual professional men and the small service shops.

For 1939, the Department of Commerce estimated that there were 1,652,000 entrepreneurs in the service industry. /150/ Including the 60,000 corporations mentioned above and taking account of the number of entrepreneurs who were partners, there were probably about 1,500,000 business units in 1939. /151/

The number of these 1,500,000 units having receipts of more than $20,000 was approximated on the basis of the 1935 Census. In that year 1.6 percent of the 574,708 establishments enumerated had receipts of more than $25,000, /152/ so that, at the outside, it did not seem that more than 5 percent or 75,000 units had sales of more than $20,000 in 1939. This 5 percent estimate takes into account the better business conditions in 1939 and the non-inclusion of professional enterprises in the 1935 Census.

11. Miscellaneous

Although the Department of Commerce listed this group as producing income of $3,319 millions in 1939, /153/ there are no data available which would enable one to approximate the number of units or distribution of gross income in this field.

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