Date September 1937
Author George (?) Haas
Title Tax Revision Studies: Income, Capital Stock, and Excess-Profits Taxes
Description Staff memo, Division of Tax Research, Treasury Department
Location Box 63; Tax Reform Programs and Studies; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.
 
VOLUME II

TAX REVISION STUDIES, 1937

INCOME, CAPITAL STOCK AND EXCESS-PROFITS TAXES


                          TABLE OF CONTENTS

        TAX REVISION STUDIES, 1937 -- INCOME, CAPITAL STOCK,
                      AND EXCESS-PROFITS TAXES

Summary of Findings and Recommendations

A. Introduction

B. Objectives of Income Tax Revision

C. Structural Revisions
     1. The Individual Income Tax Schedule
          a. Normal and Surtax Rates
          b. Personal Exemptions and Earned Income Credit
          c. Earned Income Credit
     2. Taxation of Corporations
          a. The Existing Corporation Taxes
          b. Interrelationship of Capital Stock and
             Excess-Profits Tax
          c. The Proposed Corporation Privilege Tax
     3. Joint and Separate Returns
     4. Carry-forward for Annual Net Losses
     5. Restriction of Bases for Depletion
     6. Tax Limitation on Income from Sale of Oil and Gas
        Properties
     7. Taxation of (Personal) Holding Companies
     8. Treatment of Charitable and Other Contributions
          a. Estates and Trusts
          b. Partnerships
          c. Individuals and Corporations
     9. Pension Trusts
     10. Treatment of Worthless Stock as a Capital Loss
     11. Earned Income of Nonresident Americans
     12. Building and Loan Associations
     13. Dividends Paid Credit in Connection with Tax-Free
         Distributions

TREASURY DEPARTMENT

INTER OFFICE COMMUNICATION


                                   DATE

TO       Mr. Magill

FROM     Mr. Haas

Subject: TAX REVISION STUDIES, 1937: INCOME, CAPITAL STOCK, AND EXCESS-PROFITS TAXES

SUMMARY OF FINDINGS AND RECOMMENDATIONS

In the accompanying memorandum consideration, viewed primarily from an economic standpoint, has been given to certain features of the Federal income, capital stock, and excess-profits taxes. The proposals contained herein are predicated upon three objectives: (1) The placing of increasing reliance upon the progressive taxes, (2) the coordination of the individual and the corporate income taxes, and (3) the elimination of existing structural inequities. The more significant of the conclusions are as follows:

1. With a view to increasing the relative importance of the individual income tax in the Federal revenue structure and with a view to facilitating the elimination of less desirable regressive taxes, it is recommended that the level of the surtax rate schedule be increased. Specifically, it is proposed that the present rate schedule be replaced by a new rate schedule ranging from 3 percent on surtax net income of $3,000 to $6,000 to 75 percent on surtax net income of $5,000,000 and over. In addition to affording the individual income tax a larger role in the revenue structure, the proposed rate revisions will enable a more scientific distribution of the aggregate Federal tax burden and will impose a justifiable addition to the tax burden of the middle size incomes.

2. It is recommended that the present personal exemption of $1,000 for single persons and $2,500 for married persons, be reduced, respectively, to $800 and $2,000. This will broaden the individual income tax base, making it applicable to a substantially larger number of taxpayers and will, in addition, increase the burden upon individuals subject to surtax rates. Although a lowering of personal exemptions will increase Federal revenue, the recommendation is primarily prompted by the desirability of obtaining substitute revenue from the low income classes in a more equitable manner than is possible through the miscellaneous excise taxes. It is recognized that the eventual elimination of even the least desirable indirect taxes cannot be realized so long as the personal exemptions are maintained at a relatively high level.

3. Inasmuch as the lowering of personal exemptions to the levels of $800 and $2,000 might unduly burden the recipients of small incomes, it is recommended that the earned income credit be raised from 10 percent to 15 percent and that the limitation of the earned income credit to 10 percent of net income be eliminated.

4. The two existing corporate privilege taxes, the corporate normal income tax and the capital stock tax, are believed to be relatively high as well as defective. The corporate normal income tax allows corporations with a substantial volume of business to escape the privilege tax in years of unprofitable operation. The capital stock tax overcomes this difficulty as far as concerns the taxing of corporate privilege because it applies annually to both profitable and unprofitable business corporations. It, however, is deficient in its arbitrary determination of taxable base (adjusted declared value). In combination, the two taxes are inadequate for the taxation of corporate privilege because corporations with net income pay both taxes each year whereas corporations with no net income pay only the arbitrary capital stock tax. It is, therefore, recommended that the corporate normal income tax and the capital stock tax be repealed.

5. The present capital stock and excess-profits taxes were linked for the purpose of furnishing a base for a capital stock tax as a corporate privilege tax and for establishing a base for an excess-profits tax. Neither of these objectives were achieved. On three occasions (Revenue Acts of 1934, 1935, and 1936) the corporate taxpayer has been enabled to determine that tax base which, considering the profitableness of its business, the fluctuations in such profits from year to year, and the prospects for repeal of these taxes, would result in the least aggregate amount of tax liability. Taxes which leave the taxpayer options of this character are undesirable. Furthermore, the present interrelationship of the capital stock and excess-profits taxes holds no promise of resolving the vexing problems associated with the establishment of an excess-profits tax base. It is, therefore, recommended that the repeal of the capital stock tax be accompanied by the repeal of the excess-profits tax. This, it is noted, will in no way jeopardize the opportunity of establishing a satisfactory excess-profits tax base for future use.

6. It is recommended that the present corporation normal income tax, capital stock tax and excess-profits tax be replaced by a new corporation privilege tax. The present corporation normal income tax favors corporations whose capitalization is made up of stocks and bonds, as against those with stocks only. Furthermore, the base for the existing corporation normal income tax favors corporations that rent business properties as against those that own them. Since a corporation privilege tax should properly tax corporations in accordance with the scope of their operations and in accordance with the return on the entire amount of capital operating in the business, but without regard to the character of the capital structure, it is recommended that for purposes of the new corporate privilege tax interest, rents, and royalties be disallowed as deductions and that the income of corporations include tax-exempt interest as well as inter-corporate dividends, rents and royalties.

7. The incomes of husbands and wives are not taxed as a unit under the present law. Husbands and wives may, at their option, file separate or joint returns. The husband and the wife may each report such income as is viewed to be theirs under State property laws. In community property States the usual division is one-half of the community income to each spouse; the practice followed in other States is less uniform. This results in interstate variations of Federal income tax burden. In addition, the use of separate returns enables wealthy husbands and wives to avoid high surtax rates, which would otherwise be applicable. If the incomes of husbands and wives be viewed as a unit, then to overcome the inequities resulting from the existing practice, it is recommended that when husbands and wives file separate returns, the tax liability should be determined on the basis of their aggregate income, prorated to each in accordance with the amounts of their separate incomes.

8. The present income tax base is determined primarily on an annual basis. Over a period of years and under existing progressive corporation and individual rates, this imposes a higher tax upon taxpayers receiving variable sources of income than upon those receiving stable sources of income, even though the aggregate amount of income received over the period is identical. This inequity might be rectified by averaging the income tax base for several years. Such a procedure, however, would produce much hardship during depression years when the average tax base exceeds the taxpayer's current income, out of which taxes for the most part must be paid. To accomplish some degree of averaging, it is recommended that the taxpayer's annual net losses be adjusted for non-statutory income items and carried forward for a two-year period.

To avoid impairment of revenue during depression years, it is recommended in the separate memorandum on Capital Gains and Losses that for purposes of determining the carry-forward of capital losses, the most variable of the income items, capital gains and losses, be segregated, except with respect to the undistributed profits tax. Such segregation would tend to prevent capital losses from making inroads upon the taxes determined on ordinary sources of income.

9. The allowance of discovery value and percentage depletion is believed to discriminate in favor of oil and mining interests. These bases for depletion enable the taxpayers to recoup more than 100 percent of their investment in mining and oil properties. To limit the amount of depletion allowable to the capital invested, it is recommended that cost or March 1, 1913 value be the only allowable bases for the determination of depletion.

10. The surtax on gains from the sale of oil and gas properties prospected by individuals is limited to 30 percent of the sale price. A similar limitation had been in effect under the several revenue acts through 1932 but was eliminated under the Revenue Act of 1934, only to be restored in 1936. It is recommended that this limitation be repealed. This favored treatment of the oil and gas interests rests on the theory that the application of the full surtax rates to gains from such sales tends to discourage prospecting by individuals and discriminates against them by comparison with corporations. The first of these arguments can be discarded by reference to the fact that the Federal Government is finding it necessary to restrict production; the second carries little conviction since it applies equally well with respect to other capital gains.

11. The present personal holding company tax is deficient, for its overly precise definition of the personal holding company produces difficult administrative problems. This difficulty can be surmounted if holding companies receiving 80 percent of their income from specified sources of the type now included in the definition of personal holding company income (Revenue Act of 1937) are taxed on the entire amount of their undistributed profits, according to the concentration of control. Accordingly it is recommended that the rate schedule be graduated downward from 70 percent in those cases where control is concentrated in one to five individuals, to 10 percent in those cases where control is vested in the hands of more than fifty individuals.

12. The deductions on account of charitable contributions now allowable to estates and trusts seem to be excessive. The absence of limitation upon the deduction in the case of estates and trusts enables individuals to establish trusts for the sole purpose of administering charities, thereby avoiding the 15 percent limitation upon such deduction applicable to individuals. It is, therefore, recommended that the deduction for charitable contributions in the determination of the net income of estates and trusts be limited to 15 percent.

13. Partnership net income is at present determined after the allowance of a deduction for charitable contributions up to the amount of 15 percent of partnership income. The partners, as individuals, are allowed a deduction for charitable contributions up to 15 percent of their net income, including their pro rata shares of partnership net income. Thus, individual members of partnerships are permitted two potential deductions for charitable contributions. It is, therefore, recommended that in computing the 15 percent limitation for individual members of partnerships, such individuals include their pro rata share of the partnership contributions, and further, that instead of including their pro rata share of partnership income after the deduction for charitable contributions, their pro rata share be included before such deductions.

14. Taxpayers are now permitted to treat certain donations as business expenses under Section 23(a). By shifting the donations from allowable deductions under Sections 23(o) and (q) to expenses (23(a)), individual taxpayers and partnerships can free themselves of the 15 percent and corporations of the 5 percent limitation upon deductions for charitable contributions. To prevent such shifts it is recommended that the computation of the limitations for charitable donations be based on the total amount of donations, whether included under expenses or under deductions.

15. Section 120 of the present law provides that if an individual donates amounts which together with certain taxes exceed 90 percent of his net income for each of ten years, then there is no limitation upon the deduction for charitable contributions made in subsequent years. In practice this provision applies to few, if any, taxpayers. In addition it would not operate equitably with respect to individuals with substantially similar but technically dissimilar records of large donations. It is, therefore, recommended that the section be repealed.

16. Employees' pension trusts, whether revocable or irrevocable, are now exempt from the income tax. Taxpayers are allowed certain deductions from the income tax base to support the employees' trust funds. In the case of revocable trusts, taxpayers are now enabled to shift income into such trust funds for the purpose of reducing current income tax liability and to recoup the amounts so shifted by subsequently cancelling the terms of the trusts. Similarly, bankruptcy may intervene to make funds shifted to employees' trusts available to the general creditors rather than to employees. To prevent possibilities of tax avoidance through employees' pension trusts, it is recommended that only irrevocable trusts be exempt from the income tax and only those of such trusts which, in the terms of the trust, provide for at least 75 percent of the employees of five year standing with salaries under $5,000 and provide further a plan for the distribution of the trust funds to employees in the event of liquidation.

17. At present the sale of a depreciated stock results in the realization of a capital loss, but if the depreciation is extreme so that the stock becomes worthless, the taxpayer is allowed a deduction against ordinary income to the extent of the basis for the worthless stock. This distinction between moderate and extreme depreciation in stock values is believed to be invalid for income tax purposes. It is, therefore, recommended that when stock becomes worthless, or approximately worthless, when it depreciates to, say, 3 percent of its basis, the taxpayer be allowed to include the loss among other capital losses reported for the year; and in case the worthless or near-worthless stock subsequently appreciates in value and is sold, the basis for such stock is to be the market value used in determining the capital loss.

18. Nonresident American citizens are allowed to exclude their foreign earned income from the gross income reported for Federal income tax purposes on the ground that the taxes imposed by foreign countries burden nonresident Americans to a point where any additional taxes on their earnings abroad would be unreasonable. This view is not consistent with the general framework of the Federal income tax and the system of credits allowable on account of foreign taxes paid. The basis for Federal income tax liability is citizenship, not residence. It is, therefore, recommended that so long as citizenship constitutes the basis for the tax, all citizens of the United States, whether resident or nonresident, be taxed on income from sources within and without the United States, and further, that international double taxation be avoided by allowing nonresidents the same privileges as are now granted residents, e.g., afford tax credits on account of foreign income, war profits, and excess-profits taxes against the tax determined on the citizen's aggregate income. The consideration that most foreign taxes are not of the creditable type, is not germaine because resident citizens are also burdened with nondeductible taxes.

19. Building and loan associations are exempt from the Federal income tax. The exemption appears to be predicated on the assumption that these associations are nonprofit organizations and operate on a mutual basis. Actually, building and loan associations accept deposits at interest rates differing from those on capital contributed by different classes of shareholders. They may thus be said to be in competition with the banks. It is, therefore, recommended that building and loan associations be subjected to the Federal income tax, unless they can demonstrate that their operations conform to the standards of mutuality, upon which tax exemption is predicated. This recommendation will serve to make taxable all building and loan associations which accept deposits and guarantee a fixed rate of return, as well as those which pay a rate of return on founders', organization, or other special types of shares different from that paid on ordinary members' shares. In other words, a building and loan association's tax exemption is made conditional upon a test of mutuality: the payment of a uniform rate to all contributors of capital.

20. In order to relieve a liquidated subsidiary from the full impact of the undistributed profits tax on the adjusted net income accounted to date of liquidation, the Revenue Act of 1936 provided for the allowance of earnings and profits accumulated since 1913 for purposes of determining the dividends paid credit, despite the fact that distributions in liquidation are not dividends and so not taxable as income to the recipients. This provision conflicts with the general policy expressed elsewhere in the law, that distributions not taxable to the recipients are not available for purposes of determining the dividends paid credit. The regulations respecting distributions in liquidation appear to lack adequate legal foundation. It is, therefore, recommended that Section 27(f) be repealed and that the law be clarified by making the substance of Section 27(f) an exception to Section 27(h). This would enable the Bureau to substantially follow the present procedure with closer conformity to the explicit provisions in the law.

TREASURY DEPARTMENT

INTER OFFICE COMMUNICATION


                                   DATE

TO       Mr. Magill

FROM     Mr. Haas

Subject: TAX REVISION STUDIES, 1937 - INCOME, CAPITAL STOCK, AND EXCESS-PROFITS TAXES

A. Introduction

The American experience with the income tax dates from the Civil War period. Prior to that time the Government's revenue requirements were met mainly by customs duties, with occasional use of internal revenue taxes. The emergency of the Civil War led to the enactment of a Federal income tax which, however, did not produce the best results, probably because the nature of the tax is such as to require a substantial period of experimentation and adjustment. From 1861 to 1872, during the period of its existence, this first of Federal income taxes yielded approximately $376,000,000. No resort was again made to the income tax until 1894. This tax, however, was held unconstitutional by the United States Supreme Court in 1895 before any collections were actually made under it on the ground that being a direct tax it must be apportioned among the several States on the basis of population. The Supreme Court's decision precluded the possibility of a permanent Federal income tax until the ratification of the Sixteenth Amendment on February 25, 1913. This Amendment permitted Congress to levy and collect taxes on income without apportionment among the several States and without regard to their population. In the meantime in 1909, in lieu of an income tax, Congress enacted a tax on corporations which was sustained by the Supreme Court as an excise tax.

The first of the present series of Federal income tax laws was signed by President Wilson on October 3 of the year of ratification of the Sixteenth Amendment. During the intervening quarter century the income tax has acquired an increasingly important part in the Federal fiscal system. Its productivity increased from $35 millions or 10.2 percent of all internal revenue collections during the fiscal year 1913 to a war-time peak of almost $4 billions in 1920. For the fiscal year 1937 its yield amounted to $2,149 millions, representing 46.2 percent of all internal revenue collections. For the fiscal year 1938 it is estimated that the income tax will yield about $2,950 millions, which will be about 47.1 percent of all estimated internal revenue.


                               Table 1

          Income taxes and total internal revenue receipts,
                   for the fiscal years 1925-1938
                        (On collection basis)

                                                       Total income
                                                        taxes as a
                    Income Taxes               Total    percentage
            ------------------------------   internal    of total
            Corporation  Individual  Total    revenue    internal
Fiscal      -----------------------------------------     revenue
 year                (In millions of dollars)            (percent)
-------------------------------------------------------------------
1925            916         846      1,762     2,584        68.2
1926          1,095         879     1,974      2,836        69.6
1927          1,308         912     2,220      2,866        77.5
1928          1,292         883     2,175      2,791        77.9

1929          1,236       1,095     2,331      2,939        79.3
1930          1,263       1,147     2,410      3,040        79.3
1931          1,026         834     1,860      2,428        76.6
1932            630         427     1,056      1,558        67.8

1933            394         353       747      1,620        46.1
1934            398         419       817      2,672        30.6
1935            572         527     1,099      3,299        33.3
1936            739         674     1,413      3,520        40.1
1937          1,057       1,092     2,149      4,653        46.2
1938 (Est.)       -           -     2,949      6,260        47.1

The rising importance of income taxation in the Federal fiscal structure is reflected in the rate history of the corporation and individual income taxes during the last quarter century.

In the Revenue Act of 1913 the normal tax rate was 1 percent, which three years later was increased to 2 percent. In 1917 the uniform normal tax rate was replaced by a 2 percent rate applicable to the first $2,000 and 4 percent on net income in excess of that amount. The multiple normal rate structure was retained until 1934 when the present 4 percent uniform rate was enacted. During the interim the normal rate schedule consisted of as many as three varying rates and ranged all the way from 1/2 percent on the first $2,000 applicable to the year 1929 to 12 percent on amounts in excess of $4,000 for 1918. The maximum individual surtax rates have increased from 6 percent under the Revenue Act of 1913 to the present level of 75 percent. The minimum surtax rates applied to the high level of incomes from $20,000 to $50,000 at the rate of 1 percent in 1913 and now apply to the relatively low incomes of $4,000 to $6,000 at a minimum rate of 4 percent. Combining the surtax with the normal tax, the highest income tax rate now amounts to 79 percent as against 7 percent under the Revenue Act of 1913 and 77 percent under the 1918 law.

The changes in the individual normal and surtax rates, and in personal exemptions and credit for dependents during the period 1913-1936 are presented summarily in Table 2.

The corporation income tax rates, aside from the excess-profits tax, were relatively low under the Revenue Acts 1913-1917 but since 1918 have been consistently 10 percent or in excess thereof. Changes in the corporation income tax rates for the period 1913-1936 are shown in Table 3.

B. Objectives Of Income Tax Revision

The history of the Federal Income Tax since 1913 is the history of the extension of the ability to pay principle and progressiveness in taxation. Economic principles require not only that the direction of that trend be uninterrupted but also that it be enhanced. It is in part with that end in view that the revenue revisions here proposed have been conceived. The individual surtax rates have been consistently high, with the exception of the period from 1925 to 1931 when the maximum surtax rate was lowered to 20 percent. In general, however, the individual income tax has not as yet attained its proper place in the Federal revenue system. This is evident from the heavy reliance the Federal Government has found it necessary to place upon numerous miscellaneous excise taxes which are in conflict with the principle of ability to pay and which serve to counteract the influence of the individual income tax on the nature of the distribution of the Federal tax burden.

Reference to the accompanying table (Table 4) will reveal that the share of direct taxes in internal revenue and customs declined for 68 percent at the turn of the present decade to 33.9 percent in 1934. Since then the trend has been reversed but indirect taxes bid fair to play a significant part in the fiscal system for some time. To be sure, circumstances may preclude the possibility of eliminating all regressive taxes but the role of the Federal individual income tax in the Federal revenue system should be so preeminent that the progressive features of the tax structure as a whole might be maintained in all circumstances. Income tax revision must, therefore, be directed toward increasing the importance of the individual income tax in the Federal revenue structure to the level where it will be possible to relieve the low income classes from at least some of the regressive taxes, or in any event, to increase the individual income tax in the middle and upper brackets sufficiently to counteract the regressive taxes and thereby render the aggregate Federal revenue system progressive.


                   Table 2: Individual Income Tax

           Personal Exemptions and Credit for Dependents,
      Normal Tax Rates, and Range of Surtax Rates, 1913 - 1936

                                   Personal exemptions and
                                    credit for dependents
                                ------------------------------
Revenue Act     Income Year     Married    Single    Dependent
--------------------------------------------------------------
1913           Mar. 1, 1913 -   $4,000     $3,000       None
               Dec. 31, 1915
1916           1916              4,000      3,000       None
1917           1917              2,000      1,000       $200
1918          (1918              2,000      1,000        200
              (1919 - 1920       2,000      1,000        200

1921          (1921              2,500 /1/  1,000        400
              (1922, 1923 /2/    2,500 /1/  1,000        400
1924           1924              2,500      1,000        400

              (1925 - 1928       3,500      1,500        400
1926 and 1928 (1929 /3/          3,500      1,500        400
              (1930, 1931        3,500      1,500        400
1932           1932, 1933        2,500      1,000        400
1934           1934              2,500      1,000        400
1935 and 1936  1935, 1936        2,500      1,000        400

                                        Normal tax rates
                                 --------------------------------
                                  First  $2,000-  $4,000-   Over
Revenue Act      Income Year     $2,000  $4,000   $8,000   $8,000
-----------------------------------------------------------------
1913            Mar. 1, 1913 -     1%       1%       1%       1%
                Dec. 31, 1915
1916            1916               2        2        2        2
1917            1917               2        4        4        4
1918           (1918               6        6       12       12
               (1919 - 1920        4        4        8        8

1921           (1921               4        4        8        8
               (1922, 1923 /2/     4        4        8        8
1924            1924               2        2        4        6

               (1925 - 1928        1 1/2    1 1/2    3        5
1926 and 1928  (1929 /3/             1/2      1/2    2        4
               (1930, 1931         1 1/2    1 1/2    3        5
1932            1932, 1933         4        4        8        8
1934            1934               4        4        4        4
1935 and 1936   1935, 1936         4        4        4        4

                                           Surtax rates
                                           -------------
                                           Minimum rates
                                   ----------------------------
                                   Applying to net
Revenue Act      Income Year       income block of       Rate
---------------------------------------------------------------
1913            Mar. 1, 1913 -   $20,000 - $50,000         1%
                Dec. 31, 1915
1916            1916              20,000 -  40,000         1
1917            1917               5,000 -   7,500         1
1918           (1918               5,000 -   6,000         1
               (1919 - 1920        5,000 -   6,000         1

1921           (1921               5,000 -   6,000         1
               (1922, 1923 /2/     6,000 -  10,000         1
1924            1924              10,000 -  14,000         1

               (1925 - 1928       10,000 -  14,000         1
1926 and 1928  (1929 /3/          10,000 -  14,000         1
               (1930, 1931        10,000 -  14,000         1
1932            1932, 1933         6,000 -  10,000         1
1934            1934               4,000 -   6,000         4
1935 and 1936   1935, 1936         4,000 -   6,000         4

                                         Surtax rates
                                         -------------
                                         Maximum rates
                                 ------------------------------
                                 Applying to net
Revenue Act      Income Year       income over           Rate
---------------------------------------------------------------
1913            Mar. 1, 1913 -      $  500,000            6%
                Dec. 31, 1915
1916            1916                 2,000,000           13
1917            1917                 2,000,000           63
1918           (1918                 1,000,000           65
               (1919 - 1920          1,000,000           65

1921           (1921                 1,000,000           65
               (1922, 1923 /2/         200,000           50
1924            1924                   500,000           40

               (1925 - 1928            100,000           20
1926 and 1928  (1929 /3/               100,000           20
               (1930, 1931             100,000           20
1932            1932, 1933           1,000,000           55
1934            1934                 1,000,000           59
1935 and 1936   1935, 1936           5,000,000           75

                         FOOTNOTES TO TABLE

     /1/ For net income in excess of $5,000, personal exemption was
$2,000.

     /2/ Tax for 1923 reduced 25 percent by credit or refund under
Section 1200(a) of the Revenue Act of 1924.

     /3/ Rates of normal tax reduced by Joint Resolution of Congress,
No. 133, approved by President, December 16, 1929.

                          END OF FOOTNOTES

   Table 3: Corporation income tax, undistributed profits tax and
                 excess-profits tax rates, 1909-1936

                                         Income tax rates
Revenue Act        Income year              (percent)

1909 (excise
 tax)            1909-2/28/1913                  1
1913             3/1/1913-12/31/1915             1
1916             1916                            2
1917             1917                        1 - 4 /1/
1918             1918                           12
                 1919, 1920                     10
1921             1921                           10
1921 and 1924    1922-1924                      12 1/2
1926             1925                           13
                 1926, 1927                     13 1/2
1928             1928                           12
                 1929                           11 /2/
                 1930, 1931                     12
1932             1932, 1933                     13 3/4 /3/
N.I.R.A., 1933   1933                           13 3/4 /3/

1934             1934                           13 3/4 /3/
1934 and 1935    1935                           13 3/4 /3/
1936             1936                 (1) Normal tax, 8-15 percent
                                          of normal tax net income
                                      (2) SURTAX ON UNDISTRIBUTED
                                          PROFITS, 7-27 percent

                                           Excess-profits tax
                                           ------------------
                                              Minimum rates
                                       ----------------------------
                                       Applying to          Rate
Revenue Act        Income year         net income         (percent)
-------------------------------------------------------------------
1909 (excise
 tax)            1909-2/28/1913             -                  -
1913             3/1/1913-12/31/1915        -                  -
1916             1916                       -                  -
1917             1917                 Equal to 15 percent     20
                                      of invested capital
                                      less credit
1918             1918                 Equal to 20 percent     30
                                      of invested capital
                                      less credit
                 1919, 1920                 "                 20
1921             1921                       "                 20
1921 and 1924    1922-1924                  -                  -
1926             1925                       -                  -
                 1926, 1927                 -                  -
1928             1928                       -                  -
                 1929                       -                  -
                 1930, 1931                 -                  -
1932             1932, 1933                 -                  -
N.I.R.A., 1933   1933                       -                  -

1934             1934                       -                  -
1934 and 1935    1935                 In excess of 10          6
                                      percent but not in
                                      excess of 15 percent
                                      of adjusted declared
                                      value of capital
                                      stock
1936             1936                       "                  6

                                           Excess-profits tax
                                           ------------------
                                              Maximum rates
                                       --------------------------
                                       Applying to           Rate
Revenue Act        Income year         net income         (percent)
-------------------------------------------------------------------
1909 (excise
 tax)            1909-2/28/1913             -                   -
1913             3/1/1913-12/31/1915        -                   -
1916             1916                       -                   -
1917             1917                 In excess of 33          60
                                      percent of invested
                                      capital                    
1918             1918                 In excess of 20          65
                                      percent of invested        
                                      capital                    
                 1919, 1920                 "                  40
1921             1921                       "                  40
1921 and 1924    1922-1924                  -                   -
1926             1925                       -                   -
                 1926, 1927                 -                   -
1928             1928                       -                   -
                 1929                       -                   -
                 1930, 1931                 -                   -
1932             1932, 1933                 -                   -
N.I.R.A., 1933   1933                 In excess of 12 1/2       5
                                      percent of adjusted
                                      declared value of
                                      capital stock
1934             1934                       "                   5
1934 and 1935    1935                 In excess of 15          20
                                      percent of adjusted
                                      declared value of
                                      capital stock
1936             1936                       "                  12

                         FOOTNOTES TO TABLE

     /1/ One percent rate applied to dividends out of earnings from
Mar. 1, 1913, to Dec. 1, 1915; a rate of 2 percent applied to net
income in excess of the sum of (1) excess-profits tax for the current
year, and (2) dividends received out of earnings from Mar. 1, 1913,
to Dec. 31, 1915; the 4 percent rate applied to net income in excess
of the sum of (1) excess-profits tax for the current year, and (2)
dividends received out of earnings from Mar. 1, 1913 to Dec. 31,
1917.

     /2/ Rate reduced by joint resolution of Congress No. 133,
approved by the President Dec. 16, 1929.

     /3/ The rate of tax on consolidated returns for 1932 and 1933 is
14 1/2 percent; for 1934 and 1935 15 3/4 percent on consolidated
returns for electric and steam railroads. In the Revenue Act of 1936
no distinction is made between the rates applicable to corporations
privileged to file consolidated returns and other corporations. The
1936 Act extended the privilege to file consolidated returns to
street, suburban or interurban electric railways.

                          END OF FOOTNOTES
 
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