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           (B) Ad valorem taxes and graded specific taxes
                        with no upper limit:

                        Sales in
                        excess of        Cabarets,      Linear foot
Fiscal   General        established      box leases,    tax on film
Year     Admissions     price            etc.
-------  -----------    -----------      ----------     -----------

1918       26.36          --                 --              ?
1919       50.78          /a/               0.14            2.76
1920       75.97         0.19               0.56             --
1921       88.36         0.26               1.12             --
1922       72.54         0.19               0.66             --
1923       69.34         0.15               0.69             --
1924       76.81         0.17               0.74             --
1925       29.99         0.26               0.66             --
1926       23.00         0.25               0.74             --
1927       17.07         0.15               0.73             --
1928       16.68         0.32               0.73             --
1929        4.48         0.53               0.67             --
1930        2.73         0.39               0.73             --
1931        1.85         0.15               0.52             --
1932        1.14         0.12               0.41             --
1933       14.74         0.18               0.78             --
1934       13.86         0.12               0.63             --

Fiscal       Motion picture film
Year             rentals              Prize fights, etc.      Total
------       -------------------      ------------------     ------

1918                 --                        --             26.36
1919               0.27                        --             53.95
1920               4.38                        --             81.10
1921               6.01                        --             95.75
1922               3.68                        --             77.07
1923                --                         --             70.18
1924                --                         --             77.72
1925                --                         --             30.91
1926                --                         --             23.99
1927                --                         --             17.95
1928                --                         --             17.73
1929                --                       0.40              6.08
1930                --                       0.39              4.24
1931                --                       0.27              2.79
1932                --                       0.19              1.86
1933                --                        --              15.70
1934                                                          14.61

                          FOOTNOTE TO TABLE

     /a/ Less than 0.005.

                           END OF FOOTNOTE

ART WORKS. -- A tax on designated works of art (sculpture, paintings, statuary, art porcelains, bronzes) sold by any one other than the artist was levied by the Act of February 24, 1919 at the rate of 10 per cent. Sales to educational institutions or public art museums were exempt. By the Act of November 23, 1921 the rate was lowered to 5 per cent, and the tax was repealed in 1926. The yield was insignificant, the peak being $1.5 million in 1920 (the only full fiscal year at the 10 per cent rate) and the lowest yield for a full year being $0.8 million in 1924.

Art dealers' representatives attacked the tax bitterly, /43/ particularly since a given article might be taxed several times. In general, the tax seems to have little to recommend it, from either an administrative or an economic point of view.

CHECKS. -- The check tax, enacted by the Federal Government in 1898 but repealed shortly thereafter, was not used during the world war period. By the Revenue Act of 1932 the tax was reintroduced, effective June 21, 1932, at a flat rate of 2 cents per check, including promissory notes and acceptances made payable at a designated bank. /44/ It is not collected by stamps, in contrast with the Spanish-American War tax. It expires December 31, 1934.

The tax yielded $38.5 million in the fiscal year 1933, and $41.4 million in 1934.

From an administrative point of view, the tax is probably one of the best, even though the banks are put to some additional expense in recordkeeping. THROUGH AN UNDERSTANDING WITH THE BANKS, THE BOOKS OF THESE INSTITUTIONS ARE NOT CHECKED BY INTERNAL REVENUE OFFICERS: HOWEVER, ADMINISTRATIVE AUTHORITIES HAVE TOLD THE WRITER THAT THEY ARE SATISFIED THAT THERE IS NO APPRECIABLE EVASION. /45/ The tax fulfills fairly well the requirements noted above under (b), (c), (g), (h), (i), (k), and (l).

From all other points of view there are strong reasons for condemning the tax. Its flat rate introduces a heavily regressive element in the tax system, and there appears to be a danger that it can in some instances be shifted on by the drawer to the recipient -- so at least representatives of dairy farmers feared, who testified at the revenue hearings that the average cream or egg check to farmers is between $2 and $3, and the poultry check about $5. /46/ Viewed as a commodity tax on the check itself, it is equal to a 1,000 per cent tax, according to manufacturers of checks, who are correspondingly disturbed. /47/ Insofar as it tends to make cash payrolls replace check payrolls it threatens to increase crime and to cause many inconveniences. This point, however, seems to be of minor importance since large concerns have been able to avoid the tax to a considerable extent by drawing one check to cover a large number of separate "orders" -- with a consequent reduction of revenue. In the same manner, dairy companies have been able to avoid the tax by drawing one check to cover all amounts paid in the course of a day to their farmer vendors. These practices have of course been reflected in the wide disparity between the actual and the estimated yield of the tax.

Except, therefore, as an administratively easy way of picking more or less haphazardly from the complex flow of various types of gross income, without burdening the extremely poor, the check tax has nothing to recommend it.

CLOTHING, LUXURY. -- A short-lived tax on the retail sale of designated articles of clothing was imposed by the Act of February 24, 1919, and repealed by the Act of November 23, 1921, as of January 1, 1922. The tax was levied at a rate of 10 per cent and applied only to the excess of the selling price above a certain amount specified for each article. The articles taxes and the amounts over which the excess was taxed were as follows:


House or smoking coats or jackets                )       $7.50 each
Bath or lounging robes                           )

Men's waistcoats, sold separately from suits              5.00 each

Women's and misses' hats, bonnets, and hoods             15.00 each
Men's and boys' hats                                      5.00 each
Men's and boys' caps                                      2.00 each

Men's, women's misses' and boys' boots,                  10.00 each
shoes, pumps, and slippers; exempt: made
to order for cripples

Men's and boys' neckties and neckwear                     2.00 each
Men's and boys' silk stockings or hose                    1.00 pair
Women's and misses' silk stockings or hose                2.00 pair
Men's shirts                                              3.00 each

Men's, women's, misses' and boys' pajamas,                5.00 each
nightgowns, and underwear

Kimonos, petticoats, and waists                          15.00 each

The yield was $17.9 million in 1920 and $20.4 million in 1921 (the only full fiscal year the tax was in effect).

This tax represents an experiment, apparently not very successful, with an idea embodied in several foreign tax laws. The French sales tax, for instance, has had as a complement a special rate structure for retail sales of "luxury" articles, certain articles being designated luxuries because of their nature and regardless of their selling price and certain others being taxable only if sold above stipulated prices. In a country such as the United States, which has a highly-developed income tax, there seems little point in levying this type of tax when the same revenue could be obtained from virtually the same people with far less added administrative inconvenience through an increase in income tax rates. Exception to this statement might be taken in time of war, when an effort is made to check the consumption of "non-essentials".

CLUB DUES AND INITIATION FEES. -- The tax on club dues and initiation fees is one of the few war-time taxes that have remained virtually unchanged. By the Act of October 3, 1917 a tax of 10 per cent was levied on dues, or membership or initiation fees, of any social, athletic, or sporting club or organization. There was no tax, however, if the dues or fees were not over $12 a year, or if the organization was a fraternal society fulfilling certain conditions.

The rate has remained unchanged. The Act of February 24, 1919, however, changed the exemption. Thereafter there was no tax on dues or membership fees unless the annual charge for an active resident member was over $10 and initiation fees were exempt if the condition above was fulfilled and if in addition the fee was not over $10.

The tax remained unchanged in its essentials until the Act of May 29, 1928 raised the $10 exemption for dues and membership fees to $25. No change was made by the Revenue Acts of 1932 and 1934.

The tax has shown a somewhat fluctuating yield, as follows (in millions of dollars):


                        Fiscal Year          Yield

low exemption              1919                 4.1
                           1920                 5.2
                           1921                 6.2
                           1922                 6.6
                           1923                 7.2
                           1924                 8.0
                           1925                 8.7
                           1926                10.1
                           1927                10.4
                           1928                10.4

high exemption             1929                11.3
                           1930                12.5
                           1931                11.5
                           1932                 9.2
                           1933                 6.7
                           1934                 6.0

The tax has caused considerable annoyance to administrative authorities owing to claims of organizations that they are not "social, athletic, or sporting," Organizations with only faint claims to the "educational" group status, for instance, have claimed exemption. A further method of avoidance has been developed through the practice of lowering dues and fees and making up the difference by a series of service charges -- green fees, for instance -- which are not taxable under the act. It is not clear to the writer whether the law can be amended to check this avoidance without extending the tax to cover other charges that Congress does not intend to reach, such as charges for meals. If the tax is to be retained, however, this should be attempted.

Unless the Government has some special reason for checking the growth of clubs, there seems little reason for levying this tax when an increase of 1 or 2 per cent in the personal income tax yield would secure the necessary revenue with less trouble and somewhat more equity (cf. remarks above under "Clothing, Luxury").

HOUSE FURNISHINGS. -- Similar to the taxes on luxury clothing were the 10 per cent taxes levied by the Revenue Act of 1919 on certain household furnishings when sold at retail above a certain price, the tax applying only to the excess above the price stipulated. The schedule was as follows:


Carpets and rugs, including those made           $5 per square yard
of fiber (Exempt: rugs principally made
of wool)

Fans                                             $1 each
Picture frames                                   $10 each

Portable lighting fixtures, including all
lamps, and lamp shades                           $25 each

The Act of November 23, 1921 (a) changed the basis of these taxes to sales by producer or importer, (b) lowered the rate to 5 per cent, and (c) changed the price limits to $4.50 per square yard for carpets, $6.00 per square yard for rugs, and $10.00 for each lighting fixture. The rug exemption was removed, and the picture frames tax was repealed.

The yield of these taxes was not segregated in the Internal Revenue Bureau reports until 1922. From 1922 to 1924, when the taxes were repealed, the yield never rose above $1.3 million annually.

The remarks made above with respect to luxury clothing apply likewise to these taxes.

INSURANCE. -- The only remnant of the extensive insurance taxes levied from 1917 to 1921 is the tax of 3 cents per $1.00 of premium on certain property insurance issued by foreign companies.

The Act of October 22, 1914 levied a tax of 1/2 of 1 cent per dollar or fraction of property insurance and fidelity, guarantee, etc. policies. The rate was raised to 1 cent by the Act of October 3, 1917, and life insurance policies were taxed on the basis of the amount for which insured -- 8 cents per $500 or fraction. However, if the life policy was for $500 or less, and on the industrial or weekly payment plan, the tax was 40 per cent of the first weekly premium. The life insurance taxes, it will be noted, were not annual taxes.

Some changes were made by the Act of February 24, 1919, although the rates remained virtually unaltered. An alternative to the 40 per cent tax was provided where the premium was payable monthly instead of weekly: 20 per cent of the first monthly premium. This plan was also extended to cover all policies except marine, inland, and fire (property). A special rate of 4 cents on the aggregate was given to group insurance (i.e. 25 or more). It was at this time that the foreign company tax noted above was introduced. All the taxes except this one were repealed by the Revenue Act of 1921. Data on yield from 1918 to 1922 are given in the accompanying table; data on the 3-cent tax have not been segregated in the reports.

Special insurance taxes are common in the States of the United States, but usually only as substitute for some other tax such as a corporation income tax. The distribution of the burden of taxes like those on insurance is probably complex, varying among the different types of company, policyholder, and risk insured. The social utility of insurance is such that a discriminatory tax on it is prima facie one to be avoided. The sacrifice of some $15 million to $20 million of revenue (as indicated by the 1918-1921 figures) is probably not too great to make in view of all the circumstances.


                 YIELD OF INSURANCE TAXES, 1918-1922

             --------- life ---------
Fiscal       8-cent      Industrial Weekly       Marine, Inland,
Year         Tax         Payment Policies:          and Fire:
                         40% - 20% taxes          1 cent per $1

1918          1.3             0.3                    3.8
1919          3.4             0.8                    7.5
1920          5.4             1.2                    8.0
1921          5.0             1.1                    8.4
1922          2.9             0.7                    4.6

Fiscal
Year         Casualty: 1 cent per $1               Total

1918                 1.2                             6.5
1919                 2.8                            14.5
1920                 3.9                            18.4
1921                 4.4                            19.0
1922                 2.7                            10.9

PASSAGE TICKETS. -- Under the Act of October 3, 1917 the tax on passage tickets sold for over $10 in the United States to any port not in the United States, Canada, or Mexico was as follows: over $10 to $30, $1; over $30 to $60, $3; over $60, $5. The tax has remained unchanged to date except that the Revenue Act of 1928 added Cuba to the preceding list of countries. The yield from this tax is not stated separately in the Internal Revenue Bureau reports.

PLAYING CARDS. -- Foreign experience is not always a safe guide, but the elaborate administrative precautions /48/ taken by the French Government in levying a playing card tax of about 50 cents per pack, which furnishes only 1/40 of 1 per cent of the total tax revenue, suggests that this tax can never become a very important source of revenue. As a minor item, however, at a low rate, it is probably a tax to be retained. The Federal tax was 7 cents per pack under the Act of October 3, 1917, 8 cents under the Act of February 24, 1919, and 10 cents under the 1924 Revenue Act, at which rate it has remained to date. From $2.1 million in 1919 the yield rose irregularly to a peak of $5.4 million in 1929 and receded a million dollars in 1934. The tax has no expiration date.

PLEASURE BOATS. -- A negligible source of revenue, the recently-repealed tax on pleasure boats is of interest chiefly in that it is one of the few taxes that the Federal Government has levied directly on the use of an article, collectable from the owner. Introduced by the Act of October 3, 1917, revamped by the Act of February 24, 1919, and repealed by the Act of May 29, 1928, the tax was reintroduced by the 1932 Revenue Act and repealed again in 1934. Its complex rate schedule is not worth reproducing here, although it should be noted that from 1919 to 1924 the tax was supplemented by another tax on the sale of similar boats by producers or importers. This likewise was a negligible revenue source.

From 1926 to 1928 the user tax applied only to foreign-built boats, with certain restrictions.

The tax does not seem worth bothering with.

POWERS OF ATTORNEY AND PROXIES. -- Under the Act of October 22, 1914, a tax of 25 cents was levied on each power of attorney, exemption being granted in bankruptcy and certain Government cases. The tax remained unchanged until repealed by the Act of February 26, 1926. The 10-cent tax on proxies had the same history. Protests were taxed 25 cents each under the 1914 law. Receipts from these taxes were not separately stated.

The principle of taxing such documents does not appear to be a good one. Either the rate is so low that the revenue is negligible, or so high that PRIMA FACIE desirable methods of doing business are checked and fraud is encouraged. Even when viewed as a group, stamp taxes on documents of various sorts are open to the same objections.

PRODUCE (SALES FOR FUTURE DELIVERY). -- By the Revenue Act of 1932, this tax was raised from a rate of 1 cent for each $100 to 5 cents, the increase to be effective only through the fiscal year 1934. This increase was extended to July 1, 1935 by the NIRA Act. The Revenue Act of 1934 reduced this temporary rate to 3 cents. Since the tax per transaction varies with the price, the revenue yield fell sharply during the depression ($1 million in 1932 as compared with $4 million in 1928). Thanks to the sharp increase in rates, the revenue rose to $4.2 million in 1933, and an increase in the prices of wheat and cotton carried the revenue up to $7.8 million in 1934. It is too early to tell the effects of the reduction of the rate to 3 cents.

Members of the commodity exchanges complain bitterly that a tax as high as 5 cents reduces speculation sharply. Too little is known about the economics of speculation to permit a final judgement on this point; but one or two ideas may be advanced. The burden of the tax varies with the price; but, at $1 per bushel, a sale of the standard unit of 5,000 bushels of wheat on the Chicago Board of Trade, equivalent to $5,000, would be taxed at the old rate $2.50 and at the new rate $1.50. The minimum price fluctuation permitted on the Board of Trade, is 1/8 cent per bushel, or $6.25 per contract of 5,000 bushels. At either rate, the tax is only a fraction of the minimum price movement. On the New York Cotton Exchange, the unit of trading is 100 bales, or approximately 50,000 pounds. At 13 cents a pound, a sale would be equivalent to $6,5000, on which the tax would be $3.25 at the old rate and $1.95 at the new. The minimum price fluctuation on this exchange is 1/100 of a cent per pound, or $5 per contract, which, again, is larger than the tax under either rate.

At present price levels, then, the taxes on future represent less than 1/8 of a cent per bushel on wheat and less than 1/100 of a cent per pound on cotton. (These two commodities proved the great bulk of the trading.) Thus stated, the taxes seem very light, and in fact there is no reason to feel that the tax is particularly burdensome on speculators who trade in the hope of taking advantage of substantial price movements over a period of time. They are very burdensome, however, upon a special class of speculators, the floor traders, who make "complete turns" in the market within a few hours, hoping for a profit of one or two "points". Against such traders, the tax is decidedly discriminatory. It would seem advisable that the Government distinguish between the two classes of traders (as do the exchanges themselves in their regulations governing brokerage commissions), by levying a lower rate upon floor traders who make a "complete turn" within one day than upon others. To pursue the idea further, it probably would also be well for the tax to be imposed at different rates upon "spreaders" or "straddlers" who buy and sell simultaneously in two markets and upon "hedgers" who use future trading to protect themselves against wide price swings.

No attention is given here to the problem of using taxes to destroy or control speculation. This matter can best be taken up in a later section of this memorandum, where the implication of the penalty tax imposed upon cotton futures are considered.

PROMISSORY NOTES. -- Under the Act of October 22, 1914 there was levied a tax of 2 cents per $100 or fraction thereof on promissory notes, and the Act of October 3, 1917 added drafts or checks payable otherwise than at sight or on demand. This tax remained unchanged until its repeal by the Act of June 2, 1924 and has not been imposed since that date. The revenue from this sources has not been stated separately.

At so light a rate the tax is of little consequence. At a heavier rate its feasibility from an administrative standpoint would be seriously lessened, and its effects on business practice would probably be unfavorable. This tax should be listed as one of the least desirable sources of revenue.

REAL ESTATE TRANSFER. -- Under the Act of October 22, 1914 there was levied a tax on written instruments for the transfer of realty (deeds of conveyance) if the equity was over $100. Up to $500 the tax was 50 cents, and for each additional $500 or fraction 50 cents was levied. Unchanged until its repeal by the Act of February 26, 1926, the tax was reimposed by the Act of June 6, 1932 at the same rates. It expires June 30, 1935. Receipts are not separately stated.

It would be well to retain this light tax, if only for the assistance it may give to state tax administrators who seek information on the true value of realty in connection with the administration of the property tax. As a high-rate tax designed primarily to yield revenue, however, it is of a decidedly low order. Tending as it would to check transfers, such a tax might well hinder putting real estate to its most profitable use in many instances.

SAFE DEPOSIT BOX LEASES: -- The tax on the use of safe deposit boxes is unusual in two ways: it is one of the few miscellaneous sources of revenue not tapped during the war, and like the boat tax it is levied for the use of an article, although unlike the boat tax it is not collected directly from the user. The rate is 10 per cent, and the term "safe deposit box" is defined in some detail in the law, excluding, among others, all receptacles of more than 40 cubic feet capacity. Although this definition does not so state, it appears from another subsection that the tax does not apply unless the user of the box rents it (i.e. "paying for the use of . . .") from another. Introduced by the Revenue Act of 1932, the tax was not changed by the 1934 Act. The tax yielded $2.4 million in 1933, and $2.7 million in 1934. Few, if any, administrative difficulties seem to be involved, but again one may question why such a tax is necessary when an increase of 1/2 of 1 per cent in the personal income tax yield would make up for its repeal.

SECURITY ISSUE. -- Under the Act of October 22, 1914 the issuance of bonds, debentures, or certificates of indebtedness, whether by corporations or others, was taxed at 5 cents per $100 of face value or fraction thereof. The rate remained unchanged until raised by the 1932 Revenue Act to 10 cents, where it stands today. On July 1, 1935 the rate returns to 5 cents.

Issues of stock were also taxed under the 1914 Act at 5 cents per $100 face value or fraction thereof. Beginning with the Act of October 3, 1917, no-par shares were taxed at 5 cents per $100 or actual value or fraction thereof. By the Act of November 23, 1921 no-par shares of less than $100 value each were taxed at 1 cent on each $20 of such value or fraction thereof. Otherwise the rates remained unchanged until doubled by the 1932 Act, which also added language to cover issues by investment trusts. The 1934 Act made no changes. The doubling of the rates expires June 30, 1935.

Data on yield have not been printed in segregated form, but it appears that the two taxes together have yielded not more than $25 million or $30 million in their peak years.

As very light burdens that probably rest for the most part on stockholders, the taxes have to particular rationale, but also are not very objectionable. Any attempt to obtain a considerable increase in revenue from these sources, however, would be subject to strong criticism on the grounds of unfairly handicapping certain types of organizational form and particularly in these times might prove an unwished-for hindrance to investment of new capital.

SECURITY TRANSFER. -- Under the Act of October 22, 1914 there was levied a tax of 2 cents per $100 of face value or fraction thereof on "all sales, or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal tittle to" /49/ shares or certificates of stock. No-par shares were mentioned by the Act of October 3, 1917, being taxed at 2 cents per $100 or fraction thereof of actual value. Deposits of stock certificates as collateral security were exempt, as were also deliveries to or by a broker in connection with brokerage business. The Act of November 23, 1921 changed the no-par tax to 2 cents flat, regardless of value. The rate remained unchanged until the Act of June 6, 1932 increased it (a) for shares selling at $20 or more, to 5 cents on each no-par share and on each $100 par value of par value shares; (b) for shares selling at less than $20, to 4 cents, on the same basses. These rates are in force at present, but, effective July 1, 1935, the 4-cent rate becomes 2 cents, and the 5-cent rate lapses. Certain changes, not of major importance, have been made in the scope of the law.

Administration of this tax offers no particular problem, and the chief questions seem to be whether the tax can be justified and whether a rate increase would yield proportionately more revenue.

Except as a check on speculative activity the tax probably has little to justify it. At present rates it probably does not check the kind of speculative activity -- the reckless, foolish activity -deplored by those who would like to use the tax for this end. It cannot therefore be up-held -- again, at present rates -- on these grounds. However, it probably results in a more equitable distribution of burden than most of the other miscellaneous taxes, and there is no strong reason for lowering it at this time.

Whether the rate should be raised is a question that the writer will not attempt to answer definitely at this time, since a considerable amount of research on the profit margins and the motives of floor traders is needed first. Considered in conjunction with the New York tax of 3 cents a share (4 cents if sold for more than $20), the present tax burden on shares trade in New York is probably at a point where any effort to obtain substantial amounts of increased revenue would noticeably decrease certain types of trading.

The 1932 Act introduced a tax on the transfer of bonds -- 4 cents per $100 face value or fraction thereof (certain reorganization transfers are exempt). So much bond trading takes place "over the counter" and so many bonds are bearer bonds that successful administration of this tax seems to demand that all bonds should be registered (a similar suggestion is made by Mr. Walradt for the gift tax). Certainly this would be true if the rate were raised appreciably.

The bond transfer tax expires June 30, 1935.

Attention is called to the fact that the present law taxes par value shares on a certificate basis and no-par shares on a share basis. Thus, if stock of $1 par value per share is transferred to the amount of 100 shares as a single certificate (at a price below $20 per share), the tax due is 4 cents, not $4.00. Transfer of 100 no-par shares, whether or not as a single certificate, pays $4.00 (if below $20 a share). It has been urged /51/ that all par value transfer be taxed on a share basis, as is done by New York State. The present writer's opinion is that this would be inadvisable; it would be make for too big a difference in burden (compared to value) between par value shares in the $1 -- $100 range. Admittedly, par value is a faulty base (to be used only for administrative convenience), especially in view of the existence of no-par shares; but the proposed change noted above would probably not guarantee equality of treatment, on the average, of par and no-par shares. At least it would be better first to explore the possibilities of imposing the tax on all shares, regardless of par value, by a scale related to selling price. Thus (if a single ad valorem tax is impracticable), shares selling between $0 and $10: 1 cent a share; between $10 and $20: 1 1/2 cents a share -- and so on (the figures used here are merely for purposes of illustration).

The yield of the stock transfer tax is given below (in millions of dollars). The yield of the bond transfer tax is lumped with other taxes in the published statements.


             Fiscal Year                  Yield

                1918                       2.2
                1919                       7.5
                1920                      13.4
                1921                       8.8
                1922                       9.0
                1923                       9.9
                1924                       7.9
                1925                      12.8
                1926                      17.1
                1927                      16.7
                1928                      24.2
                1929                      37.6
                1930                      46.7
                1931                      25.5
                1932                      17.7
                1933                      33.2
                1934                      38.1

TELEPHONE, TELEGRAPH, RADIO, AND CABLE FACILITIES. -- These taxes form another of the groups that were levied during the war period, dropped during prosperity, and reimposed in 1932. Under the Act of October 22, 1914 the tax was simple: 1 cent on each telephone or telegraph message, or conversation originating in the United States. No tax was levied if the charge was less then 15 cents. The tax was raised to 55 cents by the 1917 Act, and radio message were included. The next revenue act (February 24, 1919) eliminated some of the regressivity of the tax by raising the rate to 10 cents on calls or more than 50 cents. Cable messages, heretofore not taxed, were at this time subjected to the same tax, and a 10 per cent tax was levied on leased wire or talking circuit special service furnished by telephone or telegraph companies (exemption was granted to news dispatchers and to common carrier or telegraph or telephone companies for messages concerning their own businesses). The tax was repealed by the Revenue Act of 1924.

The 1932 Act reimposed the tax, refining the rate structure still further by (a) exempting all telephone calls under 50 cents; (b) taxing at 10 cents all calls of 50 cents but less than $1.00, at 15 cents all calls of $1.00 but less than $2.00, and at 20 cents all calls of $2.00 or more; and (c) changing the telegraph tax to a flat 5 per cent ad valorem. The fixed tax per message (10 cents) was retained for radio and cable dispatches. The special service tax rate was put at 5 per cent.

As an extremely rough type of luxury tax, readily collected, the tax has some merit, but it also reaches many personal communications that are doubtless necessities and makes no distinction between luxury and business expenditures. As a temporary and arbitrary method, therefore, of extracting revenue from all classes except the poor, the tax may be retained, but any increase in rates is to be criticized as merely accentuating its unfavorable features.

These taxes expire June 30, 1935.


                 YIELD OF TAX TELEPHONE, TELEGRAPH,
                      CABLE, AND RADIO MESSAGES
                       IN MILLIONS OF DOLLARS

Fiscal Year   Yield

   1918        6.3
   1919       17.9 (whereof 23 thousand from the 10 per cent tax)
   1920       27.7      "   1.0 million    "    "   "  "   "    "
   1921       28.4      "   1.1   "        "    "   "  "   "    "
   1922       29.3      "   1.2   "        "    "   "  "   "    "
   1923       30.4      "   1.2   "        "    "   "  "   "    "
   1924       34.7      "   1.4   "        "    "   "  "   "    "
    --
   1933       14.6      "    ?
   1934       19.3      "    ?

TRANSPORTATION. -- Under this heading may be grouped the taxes on rail and motor passenger and freight receipts levied by the Act of October 3, 1917, and repealed by the Act of November 23, 1921. /51/ There were four rates, as follows:

3 per cent: freight charges by rail or water or mechanical motor power carriers, competing with rail or water carriers, on intra-United States shipments.

1 cent per 20 or fraction: charges by regular-route fixed-termini express carriers.

8 per cent: passenger fares by rail or water (or mechanical motor power on regular, established line competing with rail or water). if ticket was sold or issued in United States, for intra-United States, United States-Canada, or United States-Mexico trips (exempt: commutation or season tickets for trips under 30 miles: and fares of 35 cents or less.)

10 per cent: seats, berths, and staterooms in parlor cars, sleeping cars, and vessel.

The act of February 24, 1919, changed no rates except that on seats berths, etc., which it lowered to 8 per cent. The 35-cent exemption was changed to 42 cents, and certain other, relatively unimportant changes in the scope of the law were made.

As the accompanying table shows, these taxes can raise large amounts of revenue. In certain foreign countries (e.g. France and Germany) they rank as important elements in the fiscal system. It should be noted that the taxes were in law upon the user of the rail, etc., service, and therefore were no direct drain upon the carriers themselves unless they failed to do as they should -- that is, add the tax as a separate item. As with all such taxes, however, there is a reflex action on the carriers, in that the amount of service consumed may drop because of the tax burden.

Viewed, then, as a consumption tax on the users of the facility, the tax is open to the same objections given above with respect to the communications taxes and in addition may be said to have far less of the luxury or quasi-luxury element on the average. Unless the Government needs to resort to indiscriminate taxation with little thought of how it is distributing the burden or how it may be checking business activity, the transportation tax is to be avoided. Its comparative certainty of collection, however, and the fact that the tax base is elastic enough to furnish large amount of revenue make the tax suitable if revenue considerations outweigh the kind of objections noted above.


                    YIELD OF TRANSPORTATION TAXES
                       In millions of Dollars

Fiscal      Freight     Express      Passenger    Seats,      Total
Year                                 Traffic      Berths,
                                     etc.
------      -------     -------      ----------   --------    -----

1918         30.0         6.5         24.3         2.2         63.0
1919        116.4        14.3         77.8         5.9        214.3
1920        130.8        17.6         98.8         6.1        253.3
1921        140.0        17.1         97.5         8.5        263.1
1922         85.3        12.5         58.0         6.0        161.8

TRUNKS, PURSES, ETC., -- This short-lived tax, introduced by the Act of February 24, 1919 and repealed by the Revenue Act of 1924, was akin to the luxury clothing tax noted above until its base was changed by the Act of November 23, 1921 to sale by producer or importer. At the same time that this change was made, the 10 per cent rate was lowered top 5 per cent. Partly offsetting these changes, there was lowering of the luxury standards: trunks from $50 to $35; and purses, pocket books, and shopping- and handbags from $7.50 to $5. The standard for valises, traveling bags, suitcases, hat boxes used by travelers, and fitted toilet cases was retained at $5.

Data on the retail tax collections were not segregated. The producers' tax yielded $0.2 million in 1923, and $0.4 million in 1924.

UMBRELLAS. -- The Act of February 24, 1919 levied a tax of 10 per cent on the amount in excess of $4 for which umbrella, parasols, and sun shades were sold at retail. The tax was repealed by the Act of November 23, 1921. Collection data were not segregated.

WATCHES, GLASSES, ETC. -- Like the luxury clothing tax, this tax was introduced by the Act of February 24, 1919 and levied on the retail price, but, unlike the other tax, it set no luxury standard on the basis of price. All watches, clocks, opera glasses, lorgnettes, marine and field glasses, and binoculars were taxed at 5 per cent. The tax was levied under the same section (905) as the tax on jewelry and precious stones.

A few exceptions were added by subsequent Acts: eyeglasses and spectacles (1921): religious articles and articles selling for $30 or less, and watches selling for $30 and less (1924). The tax was repealed by the Revenue Act of 1926. Collection data were merged with those on the jewelry tax (which see). The 1932 Revenue Act reimposed the tax (again as part of the jewelry clause), but in the form of a manufacturer's sales tax, at a rate of 10 per cent, and with an exemption for all articles sold for less than $3 (raised to $25 by the 1934 Revenue Act). A special tax was laid on parts for watches or clocks sold for more than 9 cents each.

As with of the other manufacturers' excises, the tax expires June 30, 1935.

MISCELLANEOUS. -- The Act of October 22, 1914 levied a miscellaneous series of documentary taxes of minor importance on indemnity bonds, (50 cents), certificates of profits (2 cents), certificates of damage (25 cents), other certificates (10 cents), and brokers; notes (10 cents). Certain miscellaneous small customs charge are not included in this memorandum.

MEMORANDUM P -- APPENDIX 1.

Reavis Cox

Taxes on Oleomargarine, Adulterated and Process or Renovated Butter, Filled Cheese, Mixed Flour and White Phosphorus Matches

The taxes here to be considered are primarily prohibitive in purpose, so that their importance cannot be judge by their contributions to the Treasury. Oleomargarine brought in $1.3 million in the fiscal year 1933 and $1.5 million in the fiscal year 1934. The receipts from all the other taxes combined are negligible, having aggregated approximately $15 thousand in each of these years.

OLEOMARGARINE TAX -- The most important among these taxes, that on oleomargarine, is also the oldest, having been imposed first in 1886. To the economist it presents in exasperating combination a commendable protection of the consumer against fraud (also in occasional instances, perhaps, against unclean products) and a thoroughly obnoxious bit of class legislation. Insofar as it protects consumers from purchasing margarine under the impression that they are buying butter and simultaneously protects butter producers against unfair competition from margarine manufacturer, the tax deserves praise. Insofar as it protects the dairy farmer from a perfectly legitimate competition, it has no valid excuse for existence. Since it has been on the statute books nearly 50 years and enjoys an almost fanatical support, there is no possibility of its being amended vary drastically (except, perhaps, to tighten further the restrictions upon margarine) much less repealed. Comments must therefore be restricted to administrative problem.

Until recently, this tax had always occasioned great difficulty in the Bureau of Internal Revenue. The center of the trouble was the differentiation between white oleomargarine (which in recent years has been taxed 1/4 cent per pound), and "artificially colored " oleomargarine which was taxed 10 cents a pound, a prohibitive rate intended to protect the butter industry. /52/ Because of the wide difference between the two rates, manufacturers continually tried to develop a naturally yellow margarine. /53/ For technical reasons yellow oils could not until recently be used in large proportions. Eventually, however, the manufacturers succeeded in producing a naturally yellow margarine, when palm oil, a favorite coloring matter, was improved by its producers so that it could be used as a major ingredient.

When the naturally yellow product appeared upon the market, dairy interest came down upon Congress with an irresistible demand for protection. In response to their agitation, the law was amended in 1931 so as to eliminate the distinction between naturally and artificially yellow margarine. Under the new plan, oleomargarine is taxed 1/4 cent per pound, except that oleomargarine "which is yellow in color" is taxed 10 cents. "Yellow" is defined precisely in term of the so-called "Lovibond tintometer scale or its equivalent".

This amendment seems to have eliminated the principal difficulties of enforcing the tax, a precise objectives test /54/ having been substituted for the necessarily uncertain adjective "artificial". A second major difficulty (that of distinguishing between margarine and cooking compounds) seems also to have been solved by the development of a workable definition. /55/ Other difficulties of administration seem to be comparatively unimportant. Under the circumstances, there are no pressing needs for further amendments.

It may be taken for granted, as long as substantial quantities of oleomargarine are sold, Congressmen from districts with strong dairy farming will continue to propose amendments designed to make the restrictions on this product more drastic. Various such proposals came before Congress last year. For example, several bills proposed that margarine other yellow be taxed 6 cents a pound, instead of 1/4 cent. It was also proposed that margarine, whether made of animal oils or not, be subjected to the kind of regulation new exercised by the Secretary of Agriculture over meat packing. This idea is representative of a wide variety of proposed restrictions (ranging up to outright prohibition) upon the manufacturer and sale of margarine. Home of the revisions proposed thus far has anything to recommend it except its possibilities as a catcher of votes in the class it is intended to benefit.

 
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