THE FEDERAL REVENUE SYSTEM
A Report To The Secretary Of The
Treasury
Members of the Staff
Roy C. Blakey
Malcolm H. Bryan
Reavis Cox
Louis Shere
Carl Shoup
Henry F. Walradt
Kossuth M. Williamson
Research Assistants
F. N. Campbell
Fred Koller
J. Wilner Sundelson
FEDERAL REVENUE SYSTEM
REPORT TO THE SECRETARY OF THE TREASURY
TABLE OF CONTENTS
Foreword
Recommendations in Which Members of the Staff Concur
Tax Policies Concerning
Personal Income Tax
Corporation Income Tax
Excess Profits Tax
Death Tax
Gift Tax
Liquor Tax
Tobacco Taxes
Manufacturers' Excise Tax
Automotive Taxes
Sales Tax
Processing Taxes
Custom Duties
Tax Revenues and Total Expenditures
Present Federal Debt
Justification of Increasing Debt by Borrowing
Effect of Borrowing on Present and Future Generations
Borrowing as Tax Technique
Borrowing as Banking Technique
Influence of Borrowing on "Tax Morale"
Additional Revenue from Taxation
Balancing the Budget
Use of the Tax System for Non-Fiscal Purposes
List of Recommendations Made by Each Member of the Staff
Automotive Taxes -- Malcomb H. Bryan
Customs Duties -- K. M. Williamson
Customs Duties on Tea, Coffee and Cocoa -- K. M.
Williamson
Federal Estate and Gift Taxes -- Henry F. Walradt
Excess Profits and Capital Stock Taxes -- Malcomb H.
Bryan
Federal Income Tax -- Roy G. Blakey
Individual Proprietorship, Partnership, and
Corporation
(Differential Treatment under the Income Tax Laws);
Imputed Income; Miscellaneous Income Tax Matters --
Carl Shoup
Liquor Taxes -- K. M. Williamson
Manufacturers' Excise and Special Taxes -- Carl Shoup
Sales Tax -- Carl Shoup
Tobacco Taxes -- Reavis Cox
Foreword
The present study, made at the request of the
Secretary of the Treasury, was planned under the
direction of Mr. Viner in the latter part of May and the
first part of June 1934. For the most part, the staff was
assembled in Washington June 20 and was disbanded about
September 20. Preliminary reports of progress were handed
to Mr. Viner on July 20, and by September 1 the finished
memoranda, with a few exceptions, were distributed among
the several staff members for mutual criticism.
Amendments made in consequence of such criticism were
incorporated in the final drafts handed to Mr. Viner on
September 20 or shortly thereafter. To Mr. Shoup was
assigned the task of formulating the general outline of
the study and coordinating the work of the group, and he
therefore wishes to acknowledge responsibility for the
report with respect to these matters.
Chiefly, the report consists of a series of separate
memoranda, one (in a few cases, more than one) person
being solely responsible for what appears in any one
memorandum. Each memorandum deals with one tax or a group
of related taxes. This method of approach, necessary in
order that important details with respect to each tax
might not be overlooked, has the disadvantage of tending
to produce a disjointed report. Therefore, a memorandum
(Memorandum D/2), dealing with the tax system as a whole,
has been drawn up to include such opinions as meet with
the unanimous approval of the staff.
Finally, it should be noted that the entire report has
been cast in terms of what is possible in the United
States at the present time. Little attention has been
devoted to changes in the fiscal system that one might
desire but that obviously cannot be made until there
occur other, more fundamental, legal and political
changes, which give no indication of appearing in the
near future. To this extent the report is concerned
primarily with the present fiscal emergency. However, the
long-run effects of the changes recommended have been
given careful consideration, and it is hoped that most of
the suggestions will be valid over a decade or more.
F. E. Campbell, Fred Koller, and J. Wilmer Sundelson
participated in the study as research assistance to
members of the staff. Acknowledgement should also be made
of the valuable assistance freely rendered by
governmental officials both within and without the
Treasury.
Recommendations In Which Members Of The Staff Concur
The several memoranda submitted as parts of the
present report each reflect the views of the writer
thereof, and not necessarily the views of others of the
group. It therefore seems advisable to present a separate
statement concerning those tax policies with which all of
the members of the staff are at this time willing to
express their agreement.
The fact that certain details are not mentioned in
this general statement does not necessarily mean that
there is decided dissent among us on such matters. Most
often it simply indicates that the members of the staff
other than the one assigned to cover the point in
question have not had an opportunity to study the matter
thoroughly enough, and therefore do not desire to commit
themselves thereon, especially as their part in the
summer's work did not call for any such commitment. If
necessary in policy formation, each of us doubtless would
be willing to hazard at least a tentative answer to most
of these questions of detail.
We find ourselves in substantial agreement on the use
that should be made of the various taxing instruments
available.
We believe that the personal income tax is not at the
moment playing an unduly large role in the Federal tax
system. Moreover, if additional revenue must be raised
after the manufacturers' excise taxes and certain of the
special taxes lapse within the next twelve months, /1/ we
believe that the personal income tax is one of the two or
three sources from which additional revenue should first
be obtained. Any increase in revenue from this tax should
be obtained by a combination of changes. One of these
changes should be a lowering of the personal exemptions.
There should also be an adjustment of the tax rate
structure, care being taken, of course, to observe
principles of equity as well as of fiscal necessity. In
this connection we should not approve of any flat
percentage increase. With respect to a lowering of the
exemptions, it should be noted that this action would
have the advantage, from our point of view, of increasing
the number of direct taxpayers and thereby the number of
persons having a conscious interest in government.
The corporation income tax is not, on the whole, so
desirable a subject for increased revenues as is the
personal income tax, because of its proportional rate and
the possible repercussions of any change upon the
relations between the two taxes. This latter remark
reminds one, of course, that any proposal for any change
in the personal tax, likewise, must take these relations
into consideration. Whether the present relations between
the two are satisfactory is a problem shot through with
complex technical factors, which are discussed in the
income tax memorandum.
Somewhat similar in form to the income taxes, but
differing decidedly from them in its rationale, is the
excess profits tax. As might be expected, opinions within
our group differ considerably as to the justification for
such a tax and, even if its justification is granted, as
to its practicability. The word "excess" is
difficult to define both in a philosophical approach to
the problem and in the drafting of a law that is
equitable in principle and administratively practicable.
We believe that the evolution of a satisfactory excess
profits tax law, if possible, will require further
thought, study, and experimentation in practice. We must
therefore, as a group, merely content ourselves within
approving any policy that, after proper investigation,
appears to offer a reasonable opportunity of taxing
"excess" profits gained at the expense of
general social well-being. With this we desire to couple
a warning that the concept of taxable excess, simple as
it may appear on the surface, is in fact extremely
difficult to cast in concrete form. With these thoughts
in mind, we recommend that the present excess profits
tax, if retained, should be regarded as experimental,and
exploratory of future possibilities, not as an immediate
source of a substantial fraction of the Government's
revenue requirements.
With respect to some form of death tax, we believe,
not only that the Federal Government should continue to
obtain the present amount of revenue from this source,
but that this, like the income tax, is one of the first
instruments that should be called upon if additional
revenue is needed. The methods of obtaining such revenue
should be much the same as those suggested above for the
income tax. There seems little force to arguments that a
death tax is inherently of a type that should be
monopolized by either the States or the Federal
Government, and until some well-integrated plan of State
and Federal fiscal relations is developed we are inclined
to favor retention of the present crediting device on
substantially the present basis.
A gift tax is justified as a complement to a death
tax, and, although we recognize that there are peculiar
and difficult problems of administration involved in this
tax, we believe it should be retained.
Liquor taxation is, at least with respect to spirits,
intimately bound up with the problem of illicit traffic
in liquor. The extent to which this problem should be
allowed to influence tax rates is obviously a matter upon
which only the special student of the subject is
qualified to pass an opinion, but as a group we agree
that any decided lowering of the present spirits rate
must rest for justification upon the possibility of
checking the illegal traffic. We concur fully in the
difficulties of judgment pointed out in the memorandum on
liquor taxes. In general, for non-fiscal reasons, we
approve of the system of taxing spirits at higher rates
than beer or wine.
The tobacco taxes as a group should not be considered
in the front rank if an appeal for additional revenue
must be made, although they can supply more money if
necessary. The tax rates differ widely among the several
tobacco products, cigarettes bearing especially high
rates. These disparities should probably be eliminated,
and in any case it seems clear that, if tobacco taxes are
to be raised, the cigarette tax should be raised last,
and, if they are to be lowered, it should be lowered
first. All of the tobacco taxes except those on cigars
are levied at specific rates, and, to make them more
responsive to changes in price levels, as well as more
equitable, it is recommended that all the rates should be
graduated on the basis of intended retail price, somewhat
as is now done with cigars. Finally, it may be noted that
none of the plans that have recently received public
notice seems to offer a desirable method of adjusting
Federal and State taxation of tobacco, considered as an
isolated matter.
The manufacturers' excise taxes, the so-called
"special" taxes on checks, admissions, etc.,
and the various stamp taxes (e.g. security issuance and
transfer) form a heterogeneous group of levies, some of
which are quite suitable as emergency taxes, but on the
whole they do not form a desirable part of a fiscal
system in normal times, and each of us can select from
the list some that we believe should not be levied at the
present time, or even if a moderate amount of additional
revenue is needed.
Six of these taxes however (those levied on
automobiles, trucks, parts and accessories, tires and
tubes, lubricating oil, and gasoline) deserve special
mention. As "user" taxes to finance the Federal
highway program they are, in differing degrees and at
certain rates, justifiable. As luxury taxes, on the other
hand, they are not very satisfactory, at least in their
present form. The gasoline tax seems to offer a special
problem in that there is a strong demand that the Federal
Government leave this field entirely to the States, or
act merely as a collecting and distributing agency for
them. We cannot agree to these programs, and believe that
the Federal Government should, at least for the present,
retain for itself some part of gasoline tax revenues,
gauging its revenue from automotive taxes to equal,
approximately, Federal appropriations for automotive
benefits. As general purpose levies the automotive taxes
have no strong appeal to us.
The sales tax, in the form of either a manufacturers'
sales tax with or without exemption of food and/or
clothing, or a "general turnover" tax on all
sales, is in our opinion one of the least desirable of
all forms of taxation, although, if a sales tax must be
levied, a manufacturers' tax is to be preferred to one on
all sales unless the amount of revenue to be raised is
very great. When consideration is taken of the
distribution of the present total tax load, we disapprove
of the manner in which the sale tax distributes the tax
burden, insofar as it is shifted. We also fear the
inequitable distribution of burden among firms of
different sizes and lines of business that would result
if, as is possible, a considerable part of the tax was
not shifted. Moreover, as another major attempt to impose
"painless" or hidden taxation, it has the
important disadvantage of imposing no barrier to wasteful
expenditure.
We have devoted relatively little time to a study of
the processing taxes and the customs duties. The former
are presumably temporary taxes, still in a state of flux
because of broad powers granted to the executive to alter
tax rates and the list of commodities taxed; the latter
are also in a process of transition through trade
bargaining. However, we know enough about both of them to
express our disapproval. With respect to the processing
taxes, we are opposed to special taxation of necessities
of life such as food and clothing, whether the tax is in
fact shifted forward to consumers (among whom are
millions on the relief rolls) or backward to the farmers
(whose benefit payments are in this case financed in part
by money from their own pockets). Whether benefit
payments should be made to farmers is a question outside
the scope of our inquiry; we are here speaking of the
processing taxes as taxes. The attitude of economists
generally on protective tariffs is well known, and we
share in the view that the country as a whole should in
the long run be more prosperous if tariffs were used only
for revenue purposes, although any change should not, as
might easily be the case, err on the side of abruptness.
In view of the many other tax problems, however, that
will be the subject of more heated debate in the coming
months, little time was allotted to customs in the
detailed studies, and the memorandum on this subject is
restricted to answering a few specific questions
concerning the purely fiscal aspects of certain imports.
None of the remarks above should be taken to imply
that we should oppose the imposition of the taxes that we
regard as undesirable, if, owing to political
considerations, these taxes offered the only alternative
to a policy of what we should consider to be excessive
borrowing or undue contraction of essential expenditures.
The point is that we believe it to be economically and
administratively feasible to avoid excessive borrowing or
undue economy without resorting to such taxes.
The problem of the fiscal relations of the Federal,
State, and local Governments has no ready solution to
which any of us can subscribe. As indicated above,
certain conclusions with respect to particular taxes may
be reached for temporary purposes, but a satisfactory
long-term solution will depend upon a comprehensive
program integrating the entire tax system.
The points discussed above are also covered in the
several memoranda, There are some other topics,
concerning the tax system in general rather than any
specific tax, that can only be noted briefly.
Tax Revenues And Total Expenditures. /2/ -- The
present wide gap between tax revenues and total
disbursements poses the problem of whether the next
Congress should take energetic measures to assure that
part or all of the gap be eliminated for the fiscal year
1935-36 and thereafter. It is difficult to speak of this
matter without reference to specific levels of debt,
expenditures, and tax revenues, yet the present
discussion must omit such items, largely because our
survey has been cast in more narrow and detailed terms of
the several taxes and time has therefore not permitted a
thorough study of the budgetary problem. We are, however,
agreed on the following statements of general policy,
some of which might seem so elementary as to be not worth
mentioning were it not for the fact that they are apt to
be neglected under the pressure of emergency such as the
present.
1. The situation calls for more than merely drifting
with the tide of expenditure on the assumption that no
grave problems would be presented by a large increase in
the present Federal debt.
2. Further marked increase in the debt can be
Justified only if it promises to result in a level of
business activity materially higher than would occur if
revenues were raised by taxation instead of borrowing.
This does not imply that relief or other needs should not
be cared for; indeed, it does not touch the problem of
expenditures, but bears merely on the manner of meeting
the expenditures.
3. Domestic borrowing by the government distributes
the burden between the present generation and future
generations in a degree and manner very difficult to
ascertain, as is indicated when one attempts to trace all
the indirect effects of a borrowing policy. Such an
analysis, moreover, is impossible to carry through except
in general terms. True, the borrowing may result in no
long-run burden for the present generation if it aids
business recovery in the manner indicated above. If it
does not, however, it is than likely to become an
instrument of hidden taxation whereby government
disbursements are made largely at the expense of those
persons adversely affected on balance by the consequent
rise in prices.
4. Viewed narrowly as a matter of tax technique,
hidden taxation of this type is the worst kind of tax.
The approximate distribution of its burden among specific
groups in the community is not so predictable as that of
ordinary taxes; so far as it can be predicted, one may
say that it can load, with disquieting swiftness, to a
distribution of burden that we should agree would be
unjust even when account is taken of the injustices
caused by the deflation of 1929-1933; and, perhaps worst
of all, those who are burdened are not apt to realise the
source of their troubles until it is too late for them to
take effective action to present their case.
5. Viewed as a matter of banking technique, the
problem posed by further borrowing is outside the
immediate scope of our study, but even as students of
taxation we necessarily note that a policy of excessive
delay in covering expenditures by taxation inevitably
affects the banking structure, introducing a factor that
must be carefully considered in any final, well-rounded
view of the problem.
6. An abstention for long periods from the use of
taxation to cover all expenditures necessarily weakens
what may be called "tax morale". The
willingness consciously to impose a tax burden upon
oneself declines, and the ultimate restoration of
governmental finances to a normal basis becomes
correspondingly more difficult. Where the danger line
lies in this matter -- whether we are near it now or not
-- must remain a matter of individual judgment, but we
believe that borrowing has been carried far enough to
warrant serious consideration of this aspect of the
financial problem.
7. There is substantial agreement among us that the
Federal Government should within the near future raise
additional revenue from taxation, particularly to supply
funds to meet the service of the increasing debt
(although this letter point is not to be taken as a
formula having any special validity regardless of other
conditions affecting the budgetary problem). For reasons
noted above, we do not care, in this memorandum, to
express our opinions in terms of specific figures.
However, as may be gathered from the contents of this
memorandum, we are keenly aware of the dangers that may
result from a long-continued policy of heavy borrowing.
8. It will be noted that most of the points above have
dealt with the possible dangers, from the point of view
of taxation, inherent in a policy of extensive borrowing.
This does not imply a commitment on the part of the group
as to the time at which the budget should be balanced.
Comment has been east in the terms noted above because we
feel that in this way our opinions can be of most use,
since a borrowing policy has been in effect for a
considerable period and the time has come for a frank
consideration of these dangers.
Use Of Tax System For Non-Fiscal Purposes. -- Since
the spirit of the times appears to call for a
considerable amount of Government regulation and support
of activities hitherto left largely to the play of
private forces, it is pertinent to inquire into the
extent to which the tax system can be made an instrument
of this policy. "Non-fiscal" uses of the
Federal tax system have long been common; witness the
customs duties, and the taxes on theatre-ticket
speculators, state bank notes, cotton futures,
oleomargarine, filled cheese, mixed flour, and narcotics.
A strong non-fiscal element is apparent in the weighting
of the liquor taxes against spirits.
Recently, however, talk of more ambitious attempts to
use the Federal revenue system as a regulatory mechanism
has been heard. The tax system, so the argument runs, may
be employed to eliminate business cycles or at least to
lessen their severity, by penalizing
"over-saving" and encouraging consumption, by
checking speculation, by favoring certain geographical or
social classes at the enzymse of others, by encouraging
business initiative, by discouraging "unwise"
business expansion, and so on. Finally, there is always
the plea for "redistribution of wealth" through
the tax system.
To use of taxes for other than revenue purposes is not
necessarily an evil, but in all such cases great care
should be taken to consider all possible effects, some of
which may be undesirable and contrary to the ultimate
goal originally contemplated. With respect to the more
ambitious attempts, such as those noted above, we think
further study in necessary and we wish to point out some
of the difficulties. We believe that at present not
enough is known about the economic mechanism to warrant a
conclusion as to whether, if saving is checked, certain
advantages with respect to the business cycle will or
will not follow. Then there is always the troublesome
problem of degree, and here even the primary effect of
certain tax changes cannot be predicted. To illustrate: a
discriminatory tax of, say, 25 percent on all income from
savings would perhaps result in smaller savings than
would have occurred without the tax, but how much
smaller, if any, or what the effect would be on the
business cycle, we cannot say.
With respect to redistribution of wealth through the
tax system, it should be noted that every tax system
accomplishes this in one way or another. Probably the
only kind of system that would not do so would be one
whereby the taxpayer received in exchange for his payment
some specific, measurable benefit worth exactly what he
was taxed. "Redistribution" is often taken to
mean such action as would actually increase the transfer
of wealth from the rich to the poor through the machinery
of taxation and expenditures. However the word may be
defined, we feel no need to attempt in this paragraph a
definite answer to the question that it raises; for,
insofar as the problem is one of taxation, our
recommendations respecting the several taxes may speak
for themselves, and, insofar as it is one of extent and
nature of expenditures, the topic lies outside the scope
of our present study.
Some of the factors noted above inevitably influence
our decisions on the relative desirability of certain
taxes. They do not, however, predominate. It should also
be noted that all taxes have non-fiscal aspects, in the
sense that they do, in some manner, influence economic
and social conditions. The emphasis in the discussion
above, however, has been on the problems of consciously
using a tax system as an instrument for certain
well-defined non-fiscal goals.
In summary, there is a heavy burden of proof to be
borne by those who would attempt to use the tax system to
influence decidedly the major economic currents of the
country, but we grant that taxation can be very helpful
with respect to certain more narrowly restricted
regulatory activities. For the rest, the system should be
so constructed that it does not discriminate markedly
against any given types of economic activity not clearly
undesirable from the social point of view.
Roy G. Blakey
Louis Shere
Malcolm H. Byran
Carl Shoup
Reavis Cox
Henry F. Walradt
Kossuth M. Williamson
Note: This memorandum was drafted by
the seven members of the staff. Inasmuch as the names of
the research assistants also appear in connection with
the summer's work in general, it should be noted that
they are not to be held in any way responsible for the
ideas expressed either in this memorandum or in the
individual memoranda. The staff wishes, nevertheless, to
express its appreciation of their aid in the
investigations.
Memorandum D
List of Recommendations Made by Each Member of the
Staff
The recommendations listed in each of the several
memoranda are here grouped together. These
recommendations in each case represent the conclusions of
the writer of the memorandum concerned, and do not
necessarily reflect the views of the members of the
staff, since time has not permitted a thorough study by
each member, of all the topics covered. Finally, these
recommendations must not be judged apart from the
supporting data in the memoranda, lost misinterpretation
arise. For the general points upon which the staff
members desire to record their unanimous agreement, the
reader is referred to Memorandum C.
Recommendations
These recommendations with respect to the Automobile
Taxes are made by Mr. Malcolm H. Byran. --
General
1. That the Federal Government should not use
automotive revenues for general purposes.
2. That the Federal Government should gauge its
automotive taxes to equal, approximately, its expenditure
on highways.
a. Federal expenditure on roads contribute special
benefits to automotive users.
b. There is some reason for levying on the automobile
user, however, something less than the entire amount
expended on highways:
(1) An indeterminable fraction of the benefits arising
from highway outlays accrue to persons other than highway
users. Some expenses are presumably incurred for military
and postal purposes.
(2) Certain expenditures for roads in public parks and
reservations, while doubtless yielding important benefits
to particular automobile users, could probably be, at
least in part, more appropriately financed by the use of
tolls or some other device for closer assessment of the
costs upon the actual beneficiaries.
3. That the Federal Government should not endeavor to
recoup from the automobile user emergency expenditures on
highways for unemployment relief.
a. To the extent that these are loans to the States,
they are the proper charge against State revenues, not
Federal.
b. To the extent that they are outright grants to the
States, recovery from the automobile users would involve
serious inconsistency, since very genuine incidental
benefits from reemployment efforts on other public works
are being accorded to property owners and others against
whom no effort to assess a payment for the benefits is
being made.
4. That the expenditure program for highway purposes
should be given close reexamination.
a. The taxation of automobile users on the theory of
special benefits necessitates close attention to the
actual delivery of the benefits presumed. The
circumstances that the special expenditures for highways,
moreover, can be covered by special taxation of
automobile users is not substantial evidence as to the
economic desirability of the expenditure.
Specific
1. That attention should be given to the inclusion, at
a proper relative rate, of fuel for Diesel engines -- now
coming into more widespread use in the motor
transportation field.
2. That a tax on automotive truck tractors designed
for highway use and tax on trailers should be added to
the vehicle schedule.
3. That the rate on trucks should be graduated in
accordance with a weight and/or capacity formula in order
to care for the factor of ton-mile road use and road
damage not satisfactorily assessed by a motor fuel tax.
4. That the application of a slightly graduated rate
on passenger cars to assess the luxury element of higher
priced vehicles should be further considered.
a. If adopted, a luxury graduation should be moderate,
and applied by narrow brackets (not to the entire sale
value) in order to disturb as slightly as possible the
price structure of the automobile industry.
5. That the levy of taxes designed to assess
automobiles should be as closely confined to the user as
is administratively practicable.
a. There seems no reason for levying a special excise
on lubricating oil used in nonautomotive equipment, such
as industrial machinery, mine machinery, railroad journal
boxes, and so forth. Moreover, the tax is comparatively
excessive on the cheaper grades of oil employed in many
nonautomotive connections.
b. It hardly seems appropriate under an automobile
tax, presumably related to highway benefits, to tax tires
on ambulance cots, toys, and so on.
These recommendations with respect to the Customs
Duties, are made by Mr. K. M. Williamson.
Though the prospects of the general adoption of a
revenue tariff may not be bright at the present time, it
may be well to state the rules which should be followed
if and when such a tariff is adopted. These rules may be
briefly stated as follows:
(1) A few articles of wide consumption should be
selected rather than a large and indiscriminate list. The
fewer the articles, the simpler and less costly the
administration. The number of articles should, however,
not be made too few, because of the tendency increase of
rates to produce proportionately less revenue as the
points of diminishing returns are reached.
(2) Articles selected should be relatively inelastic
in demand, so that revenue will not be curtailed by
restriction of consumption.
(3) Articles chosen should so far as possible not have
too great value in small bulk lest smuggling be
encouraged.
(4) The articles chosen should as far as possible not
be domestically supplied, lest demand be shifted from
imported to domestic goods, with loss of revenue. This
result can, however, be avoided as was done for certain
articles in England, by imposing upon domestic articles
excise taxes equivalent to customs duties upon the
similar imported articles. /3/
Additional principles which should be considered in
the construction of a tariff for revenue only are:
(1) That no duty should be imposed at a rate higher
than that which will yield the maximum amount of revenue,
and
(2) That in order to provide a revenue sensitive to
rising prices ad valorem duties should be preferred to
specific duties.
A brief examination of the present free list indicates
that considerable revenue may be obtained from making
certain of the articles of that list dutiable, should
that policy appear advisable. Tea, coffee, and unprepared
cocoa, now on the free list, are treated in Memorandum K.
Time does not permit a full examination of all the other
articles on the free list but a few items will serve to
illustrate the revenue possibilities of applying duties
to free list articles at this time. Take bananas for
example. During the calendar year 1933, we imported 39.6
millions of bunches of this fruit. A duty of 50 cents a
bunch if it did not seriously curtail consumption would
yield perhaps $16,000,000. Rubber is another article not
produced domestically. In the same year we imported
963,656,038 pounds of this article. A duty of one cent a
pound would probably yield approximately $9,000,000. If
the fiscal emergency requires it, a further study of the
free list articles might be made to determine which seem
most desirable for the application of duty. /4/
These recommendations with respect to the Customs
Duties on Tea, Coffee, and Cocoa, are made by Mr. K. M.
Williamson.
(1) The writer recommends that, on grounds of equity,
duties be not imposed upon tea, coffee and cocoa beans.
These duties, like other taxes which rest upon widely
consumed commodities, are very regressive in their
burden, bearing proportionately more heavily upon the
poor than upon the well-to-do. In view of the apparent
distribution of the burden of the present tax system such
additions of taxes upon the "breakfast table,"
would, in the writer's opinion, be a violation of tax
equity.
(2) The writer, therefore, recommends that, in the
search for new sources of revenue to meet the present
fiscal emergency, the revenue possibilities of direct
taxes and of other taxes shown to be equitable by other
memoranda be exhausted before resort to duties upon tea,
coffee and cocoa beans.
(3) If, however, it becomes imperative to introduce
into our tax structure more sources which are dependable
in depression and at the same time quite responsive to
price changes, the writer agrees that duties upon these
articles of relatively inelastic demand should be in the
forefront of consideration.
These recommendations with respect to The Federal
Estate and Gift Taxes, are made by Mr. Henry F. Walradt.
A. Recommendations.
1. The Federal Government should retain the basic
estate tax of 1926 with certain amendments as a part of
its permanent taxation system.
2. The Federal Government should continue to impose an
additional estate tax along the general lines of that
provided by the Revenue Act of 1932, as amended by the
Revenue Act of 1934, until its great fiscal needs
resulting from the depression have materially decreased.
3. The Federal Government should not substitute an
inheritance tax for its present estate taxes. Inheritance
or succession taxes should be left for the exclusive use
of the States. For recommendations relative to certain
features of an inheritance tax, should Congress deem such
a tax desirable see Recommendation 18.
4. The present exemptions of $100,000 in the case of
the basic estate tax and of $50,000 in the case of the
additional estate tax should be lowered.
5. The exemptions for the basic estate tax and the
additional estate tax should be identical.
6. Instead of stating some specific exemption which is
the same for all estates, the exemption should depend
upon the number and the relationship of the heirs or
beneficiaries. The following exemptions are suggested in
lieu of those provided in Section 303 (4) of the Revenue
Act of 1926 and Section 401 (c) of the Revenue Act of
1934.
(a) Such part of the estate as goes up to $15,000
to the widow
(b) Such part of the estate as goes up to $15,000
to an adult child 21 years of age
and over who is physically or
mentally incapacitated from earning
a living, (included in this group
should be minor children who because
of physical or mental infirmities
will, when they become of age, be
classed among those "incapacitated
from earning a living".)
(c) Such part of the estate as goes up to $7,500
to the husband
(d) Such part of the estate as goes up to $5,000
to a lineal ancestor.
(e) Minor children (excepting those
falling in (b)) should be graduated
according to age, the amount of
exemption being determined by the
number of years they must live to
become 21. The following scale is
suggested:
$300 per year allowed for $1,500 - $300
children from 16 years to
20 years of age, inclusive
$200 per year additional $2,300 - $1,700
allowed for children from
12 years to 15 years of
age, inclusive.
$10 per year additional $3,500 - $2,400
allowed for children from
birth until 11 years of
age inclusive.
7. There should be a proviso that in no case shall the
total personal exemptions be in excess of $50,000.
8. The exemptions should be taken from the lowest
brackets of the taxable estate rather than from the
highest brackets as is the result of the present
procedure.
9. The present exemption of $40,000 for insurance to
specified beneficiaries should be repealed. To accomplish
this the last half of Section 302 (g) of the Revenue Act
of 1926 should be amended to read as follows: "and
to the extent of the amount receivable by the executor
and by all other beneficiaries as insurance under
policies taken out by the decedent upon his own
life."
10. The Bureau of Internal Revenue might attempt to
tax the proceeds from insurance policies taken out by a
decedent upon his own life in favor of specified
beneficiaries, and over which he had retained none of the
legal incidents of ownership.
11. Instead of permitting the deduction from the gross
estate of the full amount of the value of any property or
its equivalent upon which the Federal estate tax or
Federal gift tax had been imposed within five years prior
to the death of the deceased (see paragraph (2) of
subdivision (a) and paragraph (b) of the Revenue Act of
1926 as amended), it is suggested that the amount of such
property deductible be as follows:
90 per cent of the full amount of the value of such
property when the event giving rise to the tax occurred
within one year of the decedent's death.
75 per cent of the full amount of the value of such
property when the event giving rise to the tax occurred
within two years of the decedent's death.
60 per cent of the full amount of the value of such
property when the event giving rise to the tax occurred
within three years of the decedent's death.
40 per cent of the full amount of the value of such
property when the event giving rise to the tax occurred
within four years of the decedent's death.
20 per cent of the full amount of the value of such
property when the event giving rise to the tax occurred
within five years of the decedent's death.
12. Section 301 (a) of the Revenue Act of 1926, which
provides for the rates of the basic estate tax, should be
amended to read as follows:
"Section 301 (a) In lieu of the tax imposed by
Title III of the Revenue Act of 1926, a tax equal to the
sum of the following percentages of the value of the net
estate (determined as provided in Section 303 as amended
/5/) is hereby imposed upon the transfer of the net
estate of every decedent dying after the enactment of
this act, whether a resident of nonresident of the United
States; 1 per centum of the amount by which the net
estate exceeds the personal exemptions provided in
Section 303 (c) /6/ and does not exceed $50,000;
"2 per centum of the amount by which the net
estate exceeds $50,000 and does not exceed $100,000;
"3 per centum of the amount by which the net
estate exceeds $100,000 and does not exceed $200,000;
"4 per centum of the amount by which the net
estate exceeds $200,000 and does not exceed $400,000;
"5 per centum of the amount by which the net
estate exceeds $400,000 and does not exceed $500,000;
"6 per centum of the amount by which the net
estate exceeds $500,000 and does not exceed $600,000;
"7 per centum of the amount by which the net
estate exceeds $600,000 and does not exceed $700,000;
"8 per centum of the amount by which the net
estate exceeds $700,000 and does not exceed $800,000;
"9 per centum of the amount by which the net
estate exceeds $800,000,000 and does not exceed
$1,000,000;
"10 per centum of the amount by which the net
estate exceeds $1,000,000 and does not exceed $1,200,000;
"11 per centum of the amount by which the net
estate exceeds $1,200,000 and does not exceed $1,400,000;
"12 per centum of the amount by which the net
estate exceeds $1,400,000 and does not exceed $1,600,000;
"13 per centum of the amount by which the net
estate exceeds $1,600,000 and does not exceed $2,000,000;
"14 per centum of the amount by which the net
estate exceeds $2,000,000 and does not exceed $2,500,000;
"15 per centum of the amount by which the net
estate exceeds $2,500,000 and does not exceed $3,000,000;
"16 per centum of the amount by which the net
estate exceeds $3,000,000 and does not exceed $3,500,000;
"17 per centum of the amount by which the net
estate exceeds $3,500,000 and does not exceed $4,000,000;
"18 per centum of the amount by which the net
estate exceeds $4,000,000 and does not exceed $4,500,000;
"19 per centum of the amount by which the net
estate exceeds $4,500,000 and does not exceed $5,000,000;
"20 per centum of the amount by which the net
estate exceeds $5,000,000 and does not exceed $6,000,000;
"21 per centum of the amount by which the net
estate exceeds $6,000,000 and does not exceed $7,000,000;
"22 per centum of the amount by which the net
estate exceeds $7,000,000 and does not exceed $8,000,000;
"23 per centum of the amount by which the net
estate exceeds $8,000,000 and does not exceed $9,000,000;
"24 per centum of the amount by which the net
estate exceeds $9,000,000 and does not exceed
$10,000,000;
"25 per centum of the amount by which the net
estate exceeds $10,000,000."
13. Section 405 of the Revenue Act of 1934, which
provides for the rates of the tentative tax used in
computing the additional estate tax should he amended to
read as follows: "(a) Section 401 (b) of the Revenue
Act of 1932 is amended to read as follows:
'(b) The tentative tax referred to in subsection (a)
(1) of this section shall equal the sum of the following
percentages of the value of the net estates:
'2 per centum of the amount by which the net estate
/6/ exceeds the personal exemptions provided in section
and does not exceed $20,000;
'3 per centum of the amount by which the net estate
exceeds the aforesaid personal exemptions or $20,000,
whichever is greater, and does not exceed $30,000:
'4 per centum of the amount by which the net estate
exceeds the aforesaid personal exemptions or $30,000,
whichever is greater, and does not exceed $40,000;
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