PENALTY TAXES DESIGNED TO PROTECT CONSUMERS. Process or renovated butter, 1.E. butter" which has been subjected to any process by which it is melted, clarified or refined", is taxed 1/4 cent per pound. Adulterated butter, I.E., butter to which foreign substances have been added so as to remove rancidity or to cheapen the cost, is taxed 10 cents per pound. Filled cheese, 1.E., imitation cheese made of milk and fats or oils, is taxed 1 cent per pound. Mixed flour, i.E., a flour made from mixed grains where wheat flour in the principal constituent but the product is sold as wheat flour, is taxed 4 cents per barrel of 196 pounds. White phosphorus matches, by which is meant only matches made of poisonous phosphorous, are taxed 2 cents per 100 matches. All of these rate have been in effect many years. Apparently they are high enough (and effectively enough administered) to accomplish the results the were intended to accomplish -- at least to discourage and at most to stop the production and sale of products held to be objectionable. In the instance of these products there is no reason to protest (as in the instance of oleomargarine), that the purpose of legitimate control is subordinated to a larger element of class legislation.

The Tax Narcotics

In addition to heavy import duties, narcotics pay an internal revenue tax levied at the rate of 1 cent per ounce "upon opium, coca leaves, any compound, salt, derivative, or preparation thereof". Although technically a revenue measure, the law in fact is part of the machinery set up by the Federal Government to control the import, manufacturer, sale and consumption of narcotics. As a revenue producer it is not important, having brought into the Treasury only $457 thousand during the fiscal year 1934. For that reason, a detailed analysis of its operation here is not warranted.

The Tax on Transfer of Interest in Silver Bullion

The silver Purchase Act. approved on June 19, 1934, imposes upon all sellers of silver, a tax of 50 per cent of the profit realized upon the transfer of any interest in silver bullion. This tax applies not only to domestic transfer but also to transfer made abroad, if either party thereto is a resident of the United States or is a citizen of the United States who has been a resident thereof within three months of the transfer date or if the bullion in question is in the United States.

No data were available as this was written (August 1934) concerning the revenue from this tax but a report on the first period of the collection was expected shortly. It is evident that collection have been reduced substantially, at least for the time being, by the President's silver nationalisation order of August 9, which called for all silver to be turned in to the mints within 90 days. As one of its first effects, this order resulted in the closing of the silver ring of the New York Commodity Exchange and so reduced substantially the volume of purely speculative trading. Since some speculations is still possible, however, and the tax applies also to profits made from changes in the market price of silver by those who handle the metal for industrial and professional purposes, a certain amount of revenue will continue to flow in. How much this will be, it is very difficult to estimate, although the amount is not likely to be large.

Revenue was not the sole consideration in the imposition of this tax, which apparently was intended primarily to reduce in the imposition of this tax, which apparently was intended primarily to reduce speculation in silver very sharply. In that regard it seems to have succeeded. After it become effective silver trading on the New York Commodity Exchange fell off sharply. While there is no way of proving this to be the result of the tax, the inference seems to be justified.

Pronouncements as to the monetary policies embodied in the Silver Purchase Act lie beyond the province of the present memorandum. From the fiscal point of view, the most conspicuous fact about the tax the act imposes is its differentiation among silver traders. Profits obtained from transfers of silver to the mints in accordance with the President's nationalization order are not subject to the tax. All other transfers during the period after May 16, 1934, are taxable. In effect, this means that anyone who had the misfortune to transfer his interest in the open market after May 15 and before August 9 is subject to a very heavy tax, while those who transferred their interests to the mints after this period (even though their interests were acquired during the period) escape taxation. It is difficult to find any justification for this discrimination, which should be corrected at the earliest opportunity, preferably by legislation making possible refunds to those thus unfairly treated.

Present indications are that the least one provision of the law will be subjected to test in the courts. This is the clause imposing the tax retroactivity upon profits from transfers of interest made between May 15 and June 19, the date the act became effective. Payments of taxes for this period have been made under protest, so that litigation is expected.

Administration of the tax now run into a number of difficulties which probably can be eliminated only by amendment of the law. Because of the brevity of the time available for the study, no attempt is made here to analyze the tax provisions of the law in detail. Attention will therefore be confined to a few important consideration. It may be taken for granted that suggestions for further changes will be received from the administrative officials before the next session of Congress.

Perhaps the most undesirable feature in the administration of the law is the large bookkeeping costs imposed upon both the taxpayer and the Government by the provision that the Commissioner of Internal Revenue shall abate or refund any portion of any tax attributable to profits "realized in the course of the transferor's regular business of furnishing silver bullion for industrial, professional, or artistic use and not resulting from a change in the market price of silver bullion." It has been suggested that the costs would be reduced greatly if the tax were changed to one on the net profit or income of companies trading in silver.

These costs are particularly formidable in the instance of taxpayers who make a large number of extremely small transactions in silver, often less than one ounce. In general, each transaction must be recorded and reported separately. A possible correction here would be to exempt (with appropriate safeguards against evasion all very small transaction. This could be accompanied by another amendment providing (again with appropriate safeguards) for monthly reports on silver transactions to replace the report now required for each individual transaction.

Since the act is not aimed at curtailing the industrial and professional use of silver or at penalizing the trade required to supply the industrial and professional markets, it might be advantageous to exempt such transactions. The feasibility of such an exemption (assuming it to be justified) turns upon the possibility of devising methods capable of distinguishing transactions which are part of this "legitimate" trade from the purely speculative ones aimed at making a profit out of market-price fluctuations.


Federal Control of Commodity Exchanges on Which Commodities are Sold for Future Delivery

Reavis Cox

Reference has already been made (above) to the tax on sales of produce for future delivery. In addition to this tax, there is also a special penalty tax of 2 cents per pound imposed by the Cotton Futures Act of 1916 upon all sales of cotton futures other than those made under three carefully defined types of contract -- the basis grade contract, the tendered grade contract, and the specific grade contract. No revenue was expected (or has been received) under the act, which was intended solely to force the commodity exchanges to confine themselves to these specified contract types. In practice, for technical reasons which need not be described here, the cotton exchanges have in fact restricted their dealings in futures to basis grade contracts.

Since this law is a regulatory and not a revenue measure, discussion of it would not be proper in the present memorandum except for the fact that there is continuous pressure in Congress for taxation which will either destroy or seriously cripple trading in futures. The present writer believes that this pressure (however well-intentioned it may be) should be resisted for at least two reasons: (1) Futures trading offers very valuable services in the trades to which it is adapted, so that it should not be destroyed. (2) Taxes are much too crude to be desirable as instruments of control, since they cannot well be made to distinguish adequately between desirable and undesirable trading in futures. Mere statement of these objections will not stop the pressure for punitive and regulatory taxes. It is this which justifies the inclusion here of a few necessarily sketchy suggestions as to principles upon which the control of futures trading should be based.

Whether or not the control will have to be cast for constitutional reasons in the form of a prohibitive tax upon all forms of trading other than those which conforms to the specified regulations, the present writer is not competent to judge. It may be noted, however, that the grain exchanges are controlled directly under the Grain Futures Act of 1922, sales other than those specified being prohibited. Whatever the form, there are several principles which should be respected:

(1) There should be a unified and thoroughgoing control over all futures trading. At present, grain trading is controlled to some extent through detailed legislation administered by a subordinate of the Secretary of Agriculture, cotton trading is controlled very inadequately by the Secretary of Agriculture, and all other futures trading is not regulated at all.

(2) Insofar as possible, the control established should be uniform for all commodities. Preferably, one law should be devised to establish uniform policies as regards such essential matters as types of contracts to be used, methods of organization, and control of abuses. An Administrative body could than be empowered to set up regulations adapting these policies to particular instances.

(3) Preferably this administrative body should be similar to the commission which has been set up to regulate the securities exchanges.

(4) The administrative agency should not, under any circumstances, be (a) a subdivision, branch, or agency of the Department of Agriculture. It is proper that the farm interest should receive some recognition in the composition of the controlling authority but improper that it should be the only interest recognized. (b) a branch of the commission which regulates security exchanges. Although the two are commonly confused, commodity exchanges differ widely from security exchanges in function and in problem of control. (c) a branch of the Federal Trade Commission. The problem of controlling commodity exchanges is not primarily a problem either of combatting monopoly or of eliminating unfair trade practices conducive to monopoly.

(5) Regulation of the commodity exchanges should be designed to accomplish at least the following:

(a) To restrict exchanges to what may best be described as their "normal" functions, which they should be left free to perform efficiently. These functions include the freely competitive establishment of prices, the providing of facilities for hedging, and ??? of the functions which would ordinarily be performed for the trade by a trade association.

(b) To prevent abuses, which in most instances are merely varieties of price manipulation.

(c) To take out of private hands functions which cannot be performed adequately by the exchange or which lend themselves to abuse, such as the collection, compilation, and dissemination of trade statistics and news, control over the commissions received by brokers, and "unfair" competition among brokers, arbitration of trade disputes, and the assuring of fair treatment of non-members by the exchanges.

(6) Regulation of the exchanges should not be designed to substitute government market manipulation for private manipulation. It may be said bluntly, at the risk of appearing to be dogmatic, that commodity exchanges have no place in any other than a competitive market. If the Government wishes to control prices, it should do so off the exchanges rather than by what is in effect running corners on them. In any event, persistent and consistent control over prices would probably destroy the exchanges in the end. Intermittent and variable interference with prices merely makes speculation more hazardous and interferes with the normal function of hedging.

(7) Whatever type of regulation is adopted should be flexible, as conditions change frequently and drastically.


/1/ Taxes on salt, vinegar, candles, patent medicines, vanilla, coffee and chicory, tea, cocoa and chocolate, pepper and certain other spices, vending machines, use of billiard tables, the explosives monopoly, together with certain taxes on gambling.

/2./ Wheat, cotton, corn, hogs, tires and tubes, automobile accessories, electrical energy, toilet articles other than perfumery, jewelry (with certain exceptions), refrigerators, chewing gum, (sale of all of these except wheat is subject to the low-rate (2 per cent) sales tax or a tax substituted therefor), and safe deposit boxes. Remarks concerning the French system are subject to qualification as a result of the recent tax reform, with the details of which the author is not familiar as yet.

/3./ Again excepting the benefit taxes.

/4./ Taxes on net wealth are not considered because of constitutional difficulties.

/5./ Admittedly there is considerable doubt whether the taxes on electricity, gas, firearms, and communications should not be included in group 3.

/6./ BULLETIN DE STATISTIQUE ET DE LEGISLATION COMPAREE. Dec. 1933 p. 1440 ff. Details (in billions of francs): general sales tax, 6.85; tobacco monopoly, 4.44; liquor taxes, 2.82; transportation taxes, 1.39; gasoline, etc. taxes, 1.03; sugar tax, 0.80. Total: 17.34. Total indirect taxes except customs, 26.28

/7./ A light-rate tax should be retained for reasons noted in the section below dealing with this tax.

/8/. Revenue Hearings Finance Committee, 1921, p. 699.

/9./ Revenue Hearings, Committee on Ways and Means, 1934, p. 857.

/10./ Regulations 46, Chapt. XII.

/11./ See Internal Revenue Bulletin, Cum., VIII-2, p. 369, and X-1, p. 444.

/12./ . . . a fig, date, or other fruit prepared for market by removing the seed and inserting in place thereof a nut, after which the fig, date, or other fruit is sprinkled with sugar to prevent adhering or sticking together when packed, is not candy. . . . However, if the fig, date, or other fruit is glazed, candied, or crystallized, and sold for use as candy, it is deemed to be subject to the tax. . . . "INTERNAL REVENUE BULLETIN, Cum., XII-1, pp. 404-05.

/13./ Revenue Hearings, Committee on Ways and Means, 1934, p. 860.

/14./ Ibid.

/15./ Ibid., 1921, p. 244.

/16./ Data for chewing gum along either are not available for the other years or are on a part-year basis.

/17./ Revenue Hearings, Ways and Means Committee, 1932, p. 1120. Cf. IBID., 1918, pp. 720, 722-23.

/18./ ". . . articles made of fur on the hide of pelt or of which any such fur is the component material of chief value: the language of the 1932 Act is identical with that of the 19191 Act.


/20./ Revenue Hearings, Finance Committee, 1932, p. 943; Committee on Ways and Means, 1934, p. 820.

/21./ Revenue Hearings, Finance Committee, 1932, pp. 935, 944-47

/22./ See also the section on Watches, Glasses, etc. (p.82).

/23./ Excepting the prohibitive tax on white phosphorous matches.

/24/ Including sales of ice cream and similar non-beverage foods.

/25./ E. g. grocery stores have carried on a large trade in carbonated beverages, Revenue Hearings, Committee on Ways and Means, 1918, page 168. Professor Adams said in 1921 that a perfectly enormous amount of evasion was prevalent under the retail tax., Ibid., 1921, p. 37.

/26./ Ibid., 1918, p. 166.

/27./ Revenue Hearings, Finance Committee, 1921, p. 614.

/28./ Revenue Hearings, Committee on Ways and Means, 1934, p. 877.

/29./ E.g.: The carbonic acid gas tax was said to induce bottlers to charge their drinks at low pressures, Revenue Hearings, Committee on Ways and Means, 1924, p. 53

/30./ Revenue Hearings, Finance Committee, 1932, pp. 919, 926.

/31./ Ibid., pp. 932 ff.; Revenue Hearings, Committee on Ways and Means, 1932, pp. 665 ff. hair dressings, hair restoratives, hair dyes, tooth and mouth washes, dentifrices, tooth pasts, aromatic cachous, and toilet soaps and powders.

/32./ ". . . . old by or for a dealer or his estate 8 for consumption or use (sec. 907 (a) ).

/33./ Revenue Hearings, Committee on Ways and Means, 1921, p. 46.

/34./ Ibid., 1927, p. 831.

/35./ Ibid., 1932, p. 468.

/36./ Revenue Hearings, Finance Committee, 1932, pp. 1200-1201.

/37./ Revenue Hearings, Committee on Ways and Means, 1921, p. 301.

/38./ Except for certain types of amusement, such as itinerant rodeos, wild west shows, and amusement parks, Revenue Hearings, Committee on Ways and Means, 1925, p. 562.

/39./ Revenue Hearings, Committee on Ways and Means, 1918, pp. 663-665.

/40./ From 1919 to 1926 flat taxes on shooting galleries and riding academies yielded a few thousand dollars a year.

/41./ Under the 1917 Act, children under 12 paid a maximum tax of 1 cent.

/42./ The 50 cents became 75 cents under the 1928 Act.

/43./ Revenue Hearings, Committee on Ways and Means, 1918, pp. 736; cf. Revenue Hearings, Finance Committee, pp. 642 cf.

/44./ Internal Revenue Bulletin, Cum., XI-2, pp. 535-36.


/46./ Revenue Hearings, Finance Committee, 1932, pp. 1333, 1335.

/47./ Ibid., p. 1314.

/48./ Edgar Allix, LES CONTRIBUTIONS INDIRECTES, Paris, 1929, Vol. II, p. 133.

/49./ Language of the 1932 Revenue Act. The 1914 language was almost the same.

/50./ Letters of April 6, 1934 and April 16, 1934 from E.L. Swift and Robert Jackson, Magill files. CONFIDENTIAL.

/51./ For the tax on transportation of oil pipe line, see Memorandum O. The Act of October 22, 1914 levied a 1-cent tax on bills of lading over 5 cents (repealed in 1917) and 1-cent tax on the sale of each seat or berth in palace, parlor, or sleeping cars.

/52/ It should be noted that no corresponding attempt is made to discourage the artificial coloring of butter, a very common practice. The consumer must look out for himself in deciding whether his butter is naturally or artificially yellow.

/53/ Under the rules of the Bureau of Internal Revenue, margarine was artificially colored if the yellow tint was imparted by an ingredient of which only a small proportion was used.

/54/ CF., Treasury Decision No. 4313 for the method of making the test.

/55/ CF., Treasury Decision No. 4318.