[PREVIOUS]
 
sold to persons of firms who are not, in turn, subject to sales tax on their sales. Such might be, for instance, professional men (e.g. dentist buying equipment), farmer, wholesalers and retailers in general, transportation agencies (railroads buying freight cars and locomotives), communication agencies (telegraph companies buying copper wire), etc.

Three matters are of special importance here:

(1) If the concern is one whose sales price is strictly regulated by Governmental authority, and which is not allowed to pass on to its vendees a tax passed on it by its vendors, should its purchases be allowed to go tax free? If no adjustment in freight or passenger rates is allowed railroads, for example, the tax on the sale of locomotives become in effect a tax on stockholders of railroad companies rather than a widely diffused tax the users of railroad service. Whether or not exemption should be granted to all purchases by railroads depends upon where the Government wishes the burden to fall under a sales tax. The presumption would seem to be that whatever rationale the manufacturers' sales tax possesses demands such exemption. The same problem arises with electric power, gas, and steam companies, if sales by them are no-taxable. If rates could be adjusted upward to take account of the tax burden, no exemption would be needed, but this adjustment would probably not be made, especially if the tax were an emergency one.

(2) If the concern is one that resells the article to a concern subject to the manufacturers' sales tax, exemption must be granted to purchases made by the first firm if double taxation of the second firm is to be avoided. Thus: Manufacturer A sells his products to whole-saler B, who in turn sells part of the products to retailer and the rest to manufacturer C, who uses the product as a component part of the manufactured article on whose sale he must pay manufacturers' sales tax. If all of A's sales to B are taxed, and if B shifts the tax, C is taxed both on (part of) his purchases of materials and on the sale of his finished product. If the law adopted plan (b) as outlined in the section above, allowing no exemptions at all, this situation would cause no difficulty. Under either plan (a) or the conventional plan, however, purchases of materials by a taxed manufacturer are supposed to be exempt and some arrangement would have to be made whereby the sale of manufacturer A to wholesaler B would be tax free with respect at least to those articles that B sells to C. Such an arrangement has been developed in Canada; wholesalers who which to do so may take out a license costing $2 per year, similar to the license required for all manufactures. In terms of the example above, if B takes out a license, all sales to him are exempt. Sales that he in turn makes to unlicensed purchases are taxable; sales to licensed purchasers (e.g. C) are exempt. /1/ The present Federal manufactures' excise provide for these cases without be necessary under a widespread tax is a matter for further consideration by the administrative authorities.

(3) If the purchaser is non-taxable because of a specific provision in the law and not because he falls without general class of taxpayers subject to the law (for instance, a specific exemption granted to manufacturers of food products compared to the non- taxability of wholesalers), it may be deemed advisable to exempt sales to the exempted part in order to make more effective the policy inspiring the original exemption. Indeed, it might be thought desirable to exempt sales to the vendor of the exempted party, and so on bank, were it not for administrative difficulties.

FOOTNOTE

/1/ Revenue Hearings, Committee on Ways and Means, 1932, pp. 251, 253.

END OF FOOTNOTE

Of course, the same reasoning could in certain cases be applied to parties who might be non-taxable because of the general language of the law -- e.g. newspaper publishers purchasing newsprint.

APPENDIX ONE TO MEMORANDUM Q

METHODS OF ESTIMATING TAX BASE FOR SALES TAX

The estimates of yield for a manufactures' sales tax must be based chiefly on data contained in the CENSUS OF MANUFACTURES, and data on import and exports. The latest CENSUS OF MANUFACTURES data showing totals for all industries relate to the year 1931, and the present estimates will, therefore, the valid for a future year roughly comparable to 1931.

DOMESTIC PRODUCTION. -- The total value of products for all industries reported by the 1931 Census is $41.35 billion; this compares with $70.43 billion in 1929, and $43.65billion in 1921.

If finished articles only (including, however, supplies and equipment as distinguished from materials) are taxed, the figure of $41.35 billion must be reduced considerably. The writer has segregated out of the 320 industries listed by the 1931 Census: (a) those industries that from their nature appear to sell only finished articles in the sense just used; (b) those that appear to sell only materials for further manufacture. A balance of indeterminate items was left. The total value for (a) is $22.1 billion; for (b) $2.4 billion; for (c), the indeterminate items, $16.9 billion. The chief among these indeterminate items are shown in the accompanying table.


   VALUE OF PRODUCTS, CENSUS OF MANUFACTURERS, 1931, OF INDUSTRIES
    WHOSE PRODUCTS WERE NOT SEGREGATED AS BEING WHOLLY TAXABLE OR
                           WHOLLY EXEMPT.

         (A) Whose Value of Products Was above $100,000,000
                      (In thousands of dollars)

Bags, other than paper, not made in textile mills       $   104,991

Cement                                                      148,845

Chemicals not elsewhere classified                          533,175

Cotton goods                                                805,792

Druggists preparations                                      109,448

Electrical machinery, apparatus and supplies                995,010

Flavoring extracts and flavoring syrups                     119,238

Flour and other  grain-mill products                        598,041

Foundry and machine-shop products n.e.c.                  1,266,619

Glass                                                       216,265

Hardware not elsewhere classified                           115,900

Lumber and timber products n.e.c.                           443,629

Marble, granite, slate and other stone products             119,395

Motor vehicle bodies and motor vehicle parts                945,407

Nonferrous-metal alloys; noferrous-metal products
     except aluminum n.e.c.                                 331,439

Paints and varnishes                                        350,726

Paper                                                       684,971

Paper goods n.e.c.                                          147,205

Petroleum refining                                        1,524,285

Planing-mill products (including general millwork)
   not made in planning mills connected with sawmills    $  235,681

Radio apparatus and phonographs                             193,043

Railroad repair shops, steam                                678,922

Rayon and allied products                                   132,632

Rubber goods other than tiers, inner tubes and
     boots and shoes                                        160,077

Rubber tires and inner tubes                                406,283

Sheet-metal work, not specifically classified               116,443

Silk and rayon goods                                        422,772

Stamped ware, enameled ware, and metal stampings;
     enameling, japanning, and lacquering                   122,696

Steel works and rolling mill products                     1,402,843

Structural and ornamental metal work, not made in         
     plants operated in connection with rolling mills       238,033

Sugar refining, cause                                       395,303

Tin cans and other tinware n.e.c.                           223,634

Wood preserving                                             106,514

Woolen goods                                                157,356

Worsted goods                                               338,887

         (B) Whose Value of Products Was above $800,000,000
                      (In thousands of dollars)

Cotton goods                                             $  805,792

Electrical machinery, apparatus and supplies                995,010

Foundry and machine-shop products n.e.c.                  1,266,619

Motor vehicle bodies and motor vehicle parts                945,407

Petroleum refining                                        1,524,285

Steel works and rolling mill products                    $1,402,843
                                                         __________
Total                                                     6,939,956

If it is assumed that one-half of the $16.9 billion belongs in class (a) (this will thereafter be referred to as the "one-half" assumption), there results a gross domestic tax base of $30.5 billion.

A rough check on this is furnished by the total figure for "value added by manufacture." The total tax base should not be less than this: as explained in a section above, the tax base should equal "value added" plus products of farm, mine, and fishery entering into manufacture. The total "value added" for 1931 is $19.9 billion. Computation of the other elements, to serve as a check, has not been possible for the writer thus far in view of time limitations. However, a reasonable maximum and minimum may be set. Surely at least one-fifth of the $16.9 billion, and no more than four-fifths, belongs in class (a). On these assumptions the minimum tax base is $25.5 billion and the maximum $35.6 billion, compared with the medium, or "one-half" assumption, which gives $30.5 billion. A footnote to table 3 in the summary pamphlet of the 1931 CENSUS OF MANUFACTURERS, apparently based on an estimate made in the 1929 Census, indicates that in the opinion of the Census authorities the figure should approximate two-thirds of $41.35 billion, or $27.6 billion.

Exports, presumably, would be exempt under a sales tax, and some imports would be taxable. If the tax were levied on the conventional plan of taxing only finished articles (including, however, supplies and equipment as distinguished from materials), a considerable proportion of imports would be exempted. In terms of the rough classification used in the COMMERCE YEAR BOOK, most of the "manufactured foodstuffs" and "finished manufacturers" would be taxable, and all other imports exempt. These two categories would likewise be the only ones to be considered among exports, as all other types of goods exported would be exempt even if sold internally.

If one assumed that these two categories fall into class (a) noted above, the tax base must be increased by $0.8 billion to allow for taxable imports and decreased by $1.4 billion to allow for goods exempt because exported. /1/ The difference, $0.6 billion, is so small compared to other more uncertain elements in the tax base that it might be disregarded, but for the sake of consistency in method it is subtracted from the estimates given above, and the results are (i) on the "one-half" assumption, $29.9 billion; (ii) as a minimum, $24.9 billion; (iii) as a maximum, $35.0 billion. Finally, a rough allowance must be made for sales to State and local Governments, necessarily exempt. On the basis of furnished by the Section, the writer has used $1 billion for this deduction throughout these estimates.

FOOTNOTE

/1/ Commerce Year Book, 1932, Vol. I. p. 100.

END OF FOOTNOTE

EXEMPTION OF FOODS. -- If all articles of food are to be exempted (except liquor, chewing gum, feed for animals, patent medicines, and tobacco or its products), the base for class (a) above decreased by $6.5 billion, to $15.6 billion. Details are presented in the accompanying table. Class (b) remains unchanged, and the taxable part of the indeterminate class (c) becomes $3.1, $7.7, or $12.4 billion. The total tax base thus becomes $18.7 billion minimum, $23.4 billion on the "one-half" assumption, and $28.0 billion maximum, before adjustment for imports and exports. Exports of finished manufactures excluding manufactured foodstuffs were $1.1 billion, and imports of the same were $0.5 billion in 1931. /1/ giving a net deduction of $0.6 billion and cutting the estimates above to $18.2 billion, $22.8 billion, and $27.4billion. As before $1 billion may deducted for State and local purchases. /2/

FOOTNOTES

/1/ Commerce Year Book, 1932, p. 100.

/2/ This deduction should of course vary in amount as one passes from one type of tax to another, but this element has such a high degree of uncertainty in any case that the writer did not feel justified in attempting to make such an adjustment.

END OF FOOTNOTES


         Value of Products, Food Industries, Census of 1931
                      (In millions of dollars)

     (A) Industries almost all of whose output appears to be of 
               finished (taxable) articles

Beverages                                                    212.6
  
Brad and other bakery products                             1,190.0
   
Butter /1/                                                   463.5
                                              
Canned and dried fruits and vegetables; preserves,                 
    relies, fruit butter, pickles and sauces                 513.0

Canned and preserved fish, crabs, shrimps, oysters
    and clams                                                 42.4

Cereal preparations                                          141.6

Cheese                                                        68.1

Chocolate and cocoa products not including 
     confectionery /1/                                        87.3

Coffee and spices, roasting and grinding                     271.5

Condensed and evaporated milk                                148.6

Confectionery                                                284.2

Food preparation not elsewhere classified                    147.5

Ice cream                                                    268.5

Macaroni, spaghetti, vermicelli and noodles                   36.2

Meat packing, wholesale                                    2,180.8

Oleomargarine and other margarines, not made in 
     meat-packing establishments                              22.8

Peanuts, walnuts, and other nuts, processed or shelled /1/    40.6

Poultry killing, dressing, and packing, wholesale             97.6

Rice cleaning and polishing                                   40.4

                          FOOTNOTE TO TABLE

     /1/ Admittedly there is considerable doubt as to whether the 
items should appear in this section of the table, as they are used to 
some extent by bakers, confectioners, etc.

                      END OF FOOTNOTE TO TABLE

Salt /1/                                                      40.4

Sausage, meat puddings, headcheese, etc., and sausage
     casings, not made in meat packing establishments         84.3

Shortenings (other than lard)
     vegetable cooking oils, and salad oils                  115.3
                                                             _____
Total                                                      6,488.2

     (B) Industries, a considerable part of whose output appears
             to be of unfinished (not taxable) articles 

Baking powder, yeast, and other leavening compounds           47.0

Corn syrup, corn sugar, corn oil, and starch                  98.7

Flavoring extracts and flavoring syrups                      119.2

Flour and other grain-mill products                          598.0

Malt                                                          19.2

Sugar beet                                                    85.7

Sugar cane, not including products of refineries              14.0
                     
Sugar refining, cane                                         395.3

Vinegar and cider                                              7.5
                                                           _______
Total                                                      1,384.6
FOOTNOTE

/1/ A certain amount of salt is used for non-food purposes.

EXEMPTION OF FOOD AND CLOTHING. -- If both food and clothing are to be exempt, another substantial sum must be subtracted from the original base. The aggregate value of product of clothing industries producing finished goods was $4.2 billion in 1931. The details are shown in the accompanying table. However, certain of these industries, aggregating $0.8 billion, apparently produced some things other than clothing, and unknown part of this $0.8 billion must be excepted in consequence. If one-third is arbitrarily excepted on this account, the amount to be deducted totals $3.9 billion instead of $4.2 billion. Thus the base for class (a) decreases from $15.6 billion (food exempt) to $11.7 billion. (Class (b) remains uncharged. The total of the indeterminate class, as concerns clothing, is $2.0 billion; however, not only are some of the articles in this group sold as class (b) articles, but an indeterminate amount of the total does not represent articles of clothing. Under the one-fifth assumption, only $0.4 billion would be taxable anyway, and, owing to the large but indeterminate amount representing non-clothing, about half of this may arbitrarily be removed, bringing the total to subtract from the tax base down to roughly $0.2 billion. Under the one-half assumption, the deduction becomes roughly, $0.5 billion. Under the four-fifths assumption, the total becomes roughly $0.8 billion. Thus the bases for the indeterminate articles are lowered from (food exempt) $3.1, $7.7, and $12.4 billion to $2.9, $7.2, and $11.6 billion respectively. The total tax base thus becomes $14.6, $18.9, and $23.3 billion. It is not practicable for the writer to make any adjustment for imports and exports of clothing, but the amount involved is doubtless relatively small. As before, adjustment must be made for food, bringing the final bases down to $14.0, $18.3, and $22.7 billion, and another billion should be subtracted for State and local purchases.


       VALUE OF PRODUCTS, CLOTHING INDUSTRIES, CENSUS OF 1931    
                       (IN MILLION OF DOLLARS)

     (A) Industries almost all of whose output appears to be of  
    finished (taxable) articles ( ((P)) indicates that only part
             of the item appears to represent clothing) 

Belting, leather (P)                                          14.5

Boots and shoes, other than rubber                           653.9

Boots and shoes, rubber                                       47.9

Clothing (except work clothing)
     men's youth's, and boy's n.e.c.                         551.4

Clothing women's, n.e.c.                                   1,292.3

Clothing, work (including sheep-lined and blanket             
     lined coats but not including shirts) men's              88.6

Cloth sponging and refinishing                                 2.4

Combs and hair pins, not made from metal or rubber             1.9

Corsets and allied garments                                   71.9

Fur goods (P)                                                164.7

Furnishing goods, men's, n.e.c.                               98.9

Gloves and mittens, cloth or cloth and leather combined,      
     made from purchased fabrics                              14.5 

Gloves and mittens, leather                                   28.0

Hair work                                                      1.2

Handkerchiefs                                                 18.8

Hats and caps, except felt and straw, men's                   16.9

Hats, fur-felt                                                59.6

Hats, straw, men's                                            13.9

Hats, wool-felt                                                5.4

Knit goods (P)                                               585.7

Lace goods (P)                                                19.2 

Millinery                                                    144.6

Regalia, robes, vestments, and badges                          5.7

Shirts                                                       166.8

Sporting and athletic goods, not including firearms
       or ammunition (P)                                      49.3 

Surgical and orthopedic appliances and related products       51.0

Suspenders, garters, and other elastic woven goods,
       made from purchased webbing                            17.2
                                                           -------
Total                                                     $4,186.2

(B) Industries, a considerable part of whose output appears to be of 
unfinished (not taxable articles. ( (P) indicates that only part the 
item appears to represent clothing.)

Buttons                                                       21.5

Collars, men's                                                 6.7

Cotton goods (P)                                             805.8

Cotton small wares (P)                                        42.0

Embroideries (P)                                              20.2

Leathers, plumes, and manufactures thereof (P)                 1.9

Felt goods, wool, hair, or jade (P)                           28.2

Hair cloth (P)                                                 2.4

Linen goods (P)                                                2.4

Rayon and allied products (P)                                132.6

Silk and rayon goods (P)                                     422.8

Woolen goods (P)                                             157.4

Wool shoddy (P)                                                6.0

Worsted goods (P)                                            338.9
                                                         ---------
Total                                                     $1,991.6    

     TAXATION OF ALL MANUFACTURERS' SALES. -- If all sales by 
manufacturers were taxed, regardless of whether the articles in 
question were sole to became a part of another manufactured product, 
the tax base before adjustment of exports and imports would be the 
gross figure reported by the CENSUS OF MANUFACTURES for value of 
products, $41.35 billion in 1931, or roughly $40 billion after 
subtracting State and local purchases. If food were exempt, the total 
of $1.4 billion and $6.5 billion, as given above, or $7.9 billion, 
should be subtracted, after adjusting to $7.8 billion because of the 
excess of $25 million of exports of manufactured foodstuffs over 
imports of the same, leaving roughly $32 billion. /1/

     If clothing were also exempt, to $3.9 billion plus one-half of 
$2.0 billion, or $1.0 billion, should be added the clothing items not 
heretofore included because coming from industries whose entire 
output was assumed to be of materials for other manufacturers (there 
were no such items in the food group). This total, as shown by the 
accompanying table, was roughly $0.6 billion, after allowing for some 
$171 million arbitrarily estimated as representing leather going for 
no-clothing uses. The sum of these items ($3.9 plus $1.0 plus $0.6), 
$5.5 billion, should be subtracted from $32 billion, leaving $26.5 
billion as the tax base with food and clothing exempt. /1/

                              FOOTNOTE

      /1/ With respect to the treatment of State and local purchases, 
see Note 2, p. 6 above. 

                           END OF FOOTNOTE

            VALUE OF PRODUCTS, CLOTHING INDUSTRIES, 1931 

     WHOSE OUTPUT APPEARS TO BE ALMOST ENTIRELY OF SEMI-FINISHED 
                   Nature (In Millions of Dollars)

Boot and shoe cut stock, not made in boot and shoe factories  79.7

Boot and shoe findings                                        37.4

Clothing, men's buttonholes                                    0.3

Dyeing and finishing textiles                                322.3

Furs, dressed                                                 37.9

Hat and cap materials, men's                                  11.0

Leather:  Tanned, curried, and finished (P)                  271.1

Wool pulling                                                   7.4

Wool scouring                                                  4.6
                                                           -------
     Total                                                   771.6 

     TAXATION RESTRICTED TO SALES BY MANUFACTURERS TO NON-
MANUFACTURERS. -- The writer has recommended that, if a manufacturer's 
sales tax is imposed, there be exempt from taxation, not only sales 
to manufacturers of the material that enter as component parts into 
their taxed products, but also of machinery, equipment, and supplies 
that likewise "enter into" the finished product in an economic sense 
though not in a physical sense. The remaining items entering into the 
product in an economic sense are presumably outside the scope of a 
manufacturers' sales tax, and there would be no tax on sale of them 
to the manufacturer, i.e., labor, fuel, power, real estate, and raw 
materials. 

     The principle involve may perhaps be seen more clearly by use of 
a hypothetical example.

"A", one who is not reported as a 
manufacturer in the Census of 
Manufactures,sells                       Raw materials for  $100
          
          to  

"B", a "manufacturer", who adds          Labor     costing  $700
        and sells
the resulting products         Semi-manufactured goods
                               ("materials") for            $300
                               and equipment for            $500

          to

"C", also a "manufacturer", 
who adds                                 Labor     costing  $400
    and sells
the resulting product       Finished consumers good for   $1,200 

          to

"D", a wholesaler.
    
     If the conventional plan is followed, B is taxed on his sale of 
the equipment ($500). and C is taxed on his sale ($1,200), giving a 
total tax base of                                           $1.700

     If the plan suggested by the writer is adopted, the only tax is 
upon C's sale, giving a total tax base of                   $1.200 

     The tax base for the conventional plan can be estimated by 
taking the "value added" figure, as defined by the census (value 
of product, less cost of material, containers, fuel, and 
purchased electric energy), and adding the raw materials value. 
The "value added by B is $700; by C, $900; the raw material 
cost $100; total                                            $1,700

     The same tax base can be obtained by taking the value of product 
of all manufacturers (B, $800; C, $1,200; total $2,000),and 
subtracting therefrom the value of all semi-manufactured goods 
reported ($300); total                                      $1,700

     The tax base for the plan favored by the writer can be computed 
by taking the "value added" by all manufacturers (1,600), adding the 
raw materials value ($100), and subtracting the "Value of product" of 
sales by manufacturers to other manufacturers of everything whose 
value enters as part of the "value added" by the purchasing 
manufacturer (equipment sold by B to C, $500); total        $1,200 

That is, the "value added" figure of the Census does in fact include 
an element of cost representing sales by other manufacturers to the 
manufacturer in question, and to this extent the total "value added" 
figure for all manufacturers does not represent elimination of all 
double counting of manufactured products. Stating the proposition in 
a more generalized form, the tax base here advocated is the sum of 
labor, services, materials, real estate, and everything else, by 
"non-manufacturers" to "manufacturers." Building up the estimate in 
this way, we might (a) take that part of the "value added" figure 
that represents cost other than costs incurred by purchasing or 
carrying manufacturing products that are included in Census figures of 
"value of product," and (b) add thereto the cost of "raw materials" 
sold to all manufacturers (i.e. cost of all purchases by 
manufacturers of things that are NOT included in the manufactures 
census figures and that do NOT enter as part of "value added"). 

     This opens the way for a minimum estimate. For (a) above, one 
may take wages, which totaled $7.19 billion in 1931. The other chief 
items in (a), are depreciation and interest on real estates, and the 
manufacturer's own profit. The chief items under (b) are purchases by 
manufacturers of electrical energy and raw products of forest, farm, 
mine (including raw fuel), and fishery.

     Another way of arriving at an estimate for the plan advocated by 
the writer is to start with a figure known to be to high and to work 
downward. In terms of the illustration above, one starts with the 
base for the conventional plan and subtracts all parts of the "value 
added" item represent articles contained in the Census total of 
"value of products" -- i.e., from $1,700 subtract $500, giving 
$1,200.   

     Data at hand as this is written are not sufficient to permit of 
an estimate of the base under this plan. However, it would be 
surprising to the writer if the base were more than 15 to 20 percent 
lower than under the conventional plan.  
     
     GENERAL SALES TAX. -- If all sales at all stages were subject to 
taxation with virtually no exemptions, the tax base would be greatly 
expanded. With no attempt at refinement, the following extremely 
rough estimates are submitted as giving a general idea of the 
approximate size of such a tax base.

     To a minimum of $40 billion for manufactures should be added 
some $30 billion of retail sales. No data on retail sales are 
available for 1931, but the estimate for 1933 as made by Census 
Bureau (release of August 7, 1934) is $25.75 billion compared with 
$49 billion in 1929, so that a conservative guess for 1931 may be $30 
billion. Wholesale trade should be added; the 1933 estimate for 
wholesale trade from the same source (release of August 3, 1934) is 
$30.5 billion. Although not so stated, it appears from comparison 
with detailed 1929 figures (showing a total of $69 billion) that such 
of this odes not represent true sales be independent wholesalers. Of 
the $69.3 billion 1929 total, $24.7 billion, or 36 per cent, 
represents sales by such wholesalers. /1/ Applying this percentage to 
the 1933 estimate of $30.5 billion, one obtains an estimate of $11.0 
billion for the wholesale base. To reach a 1931 basis, perhaps $2 
billion may be added, giving $13 billion. Additions may be made for 
agriculture, /2/ $6.1 billion (6.9 less 0.8 exports); coal, $0.6 
billion, /3/ petroleum, $1 billion; /4/

                              FOOTNOTES

     /1/ Census of Distribution, 1930, Vol. II, p.4.

     /2/ Commerce Yearbook, 1932, pp. 123, 124.

     /3/ Derived from data ibid., p. 225.

     /4/ Derived from data ibid., p. 241.

                          END OF FOOTNOTES

natural gas and gasoline, $0.5 billion; /1/ non-ferrous metals mined, 
$1 billion. /2/ Altogether, a grand total of approximately $90 
billion /3/ is obtained as a tax base for a year such as 1931. The 
true amount may easily be some $10 billion more or less, but the 
range $80 to $100 billion gives the general order of magnitude. A 1 
per cent tax should thus give at least $800,000,000 in a year such as 
1931.

                              FOOTNOTES

     /1/ Derived from data in commerce Yearbook, 1932, p. 257.

     /2/ Derived from ibid., pp. 322 ff.
  
     /3/ The exact sum of the above items is $92.2 billion. Inclusion 
of electric power might increase the base about $1 billion.

                          END OF FOOTNOTES


                    APPENDIX TWO TO MEMORANDUM Q

       METHOD OF DRIVING ESTIMATES OF VARIABILITY IN YIELD OF
                       SEVERAL IMPORTANT TAXES

     To measure the effect of the present business depression on tax 
yields in such a manner as to make the results comparable with what 
would have occurred under a sales tax, it is necessary to place the 
figures on a calendar year basis, since the only data for estimating 
the yield of a sales tax relate to business done in the calendar 
years 1929 and 1931 (and, to a restricted extent, 1933).

     Thus we must estimate what tax was collected on corporation 
income earned in these calendar years, or individual income received 
in the same period, etc. The effect of rate changes and changes in 
the scope of the law must be eliminated so far as possible. Other 
factors tending to invalidate the comparison (e.g. such increase in 
legal ingenuity as would have occurred without the depression) are 
probably negligible and anyway must be ignored owing to lack of data.

     CORPORATION INCOME TAX. -- The corporation tax yield for the 
calendar year 1930, as given in the reports of the Commissioner of 
Internal Revenue, was $1,242.6 million. On the assumption (partly 
invalid) that all of this represents tax paid on income earned in the 
calendar year 1929, the applicable tax rate was 11 percent, and the 
yield per 1 per cent of tax was #113.0 million. If instead one wishes 
to employ the data in STATISTICS OF INCOME, which show (1931, p. 46) 
that $1,193.4 million tax was paid on "1929 calendar year income" 
(including a considerable number of incomes reported on a non-
calendar year basis), the yield per 1 per cent of tax was $108.5 
million. The calendar year 1932 yield was $464.2 million, and on an 
assumption similar to that above, the applicable rate being 12 per 
cent, the yield per 1 per cent of tax on 1931 earnings was $38.7 
million. If STATISTICS OF INCOME data are used, as above, the total 
is $399.0 million, and the yield per 1 per cent of tax was $33.2 
million. Amounts due on 1933 calendar year earnings have not yet all 
been received. If it is assumed that the collections in the last six 
months of 1934 will equal those of the last six months of 1933, the 
fiscal year 1934 yield, $397.5 million, may be taken. Probably the 
figure should be somewhat higher, although the rate for all these 
periods was the same -- 13-3/4 per cent, plus 3/4 of 1 per cent on 
consolidated returns. If the average rate is taken as 14 per cent, 
the yield per 1 per cent of tax is $28.4 million. This figure is too 
high for comparison with 1929 and 1931, because the 1932 law enlarged 
the tax base by restricting deductions of losses from sales of non-
capital assets and restricting the carry-over of business losses. 
(The carry-over privilege was abolished in the N.I.R. Act.) These 
factors are probably offset to some degree by the use of the fiscal 
year 1934 tax yield, as indicated above, so as a rough approximation 
the figure $28.4 million may be used.

     INDIVIDUAL INCOME TAX. -- The individual income tax yield for 
the calendar year 1930 was $1,090.4 million. Assuming that this 
represents tax paid on 1929 calendar year incomes, the applicable 
normal rates were 1/2 of 1 per cent of the first $4,000, 2 per cent 
on the next $4,000, and 4 per cent on the amount in excess of $8,000. 
The STATISTICS OF INCOME figure for tax paid on "1929 income" 
(including a few non-calendar year returns) is $1,001.9 million. The 
yield for the calendar year 1932 was $320.4 million; the normal rates 
applicable, assuming this figure represents tax on 1931 calendar year 
earnings, were 1-1/2, 3, and 5 per cent on the same brackets as above. 
The STATISTICS OF INCOME figure is $246.1 million. Surtax rates were 
the same in each period. STATISTICS OF INCOME for 1929 indicate that 
about 14 per cent of total tax, or $145 million, was due to normal 
tax rates. /1/ The total tax was, as noted above, $1,002 million. In 
1931, about $70 million of the total $246 million was due to normal 
rates. /2/ The increase in normal tax rates in the interval may be 
considered roughly 30 per cent. /3/ If the rates had remained 
unchanged, normal tax yields would have dropped from $45 million to 
$54 million, instead of to $70 million. The 1931 figure for total tax 
yield is therefore $16 million too high (70 minus 54) for comparison 
with 1929, and must be reduced from $246 million to $230 million if 
one uses STATISTICS OF INCOME data on total yield. The same 
percentage reduction (6.5 per cent) may be applied to the Internal 
Revenue Report figure of $320 million, bringing it down to $300 
million.

                              FOOTNOTES

     /1/ Normal tax before credits was $162.3 million; earned income 
credit was $22.1 million. Most of this credit was dependent on the 
normal tax rate, and $17.3 million of it was arbitrarily assigned 
thereto by the writer. Total tax was $1,001.9 million.

     /2/ Normal tax before credit was $82.3 million. Earned income 
credit was $17.5 million, whereof $12.3 assumed dependent on normal 
rate.

     /3/ It was 200 per cent (1/2 of 1 per cent to 1-1/2 per cent) on 
the first $4,000, 50 per cent (2 per cent to 3 per cent) on the next 
$4,000 and 25 per cent (4 per cent to 5 per cent) on the remainder. 
Weighting by amounts of income could be done if this refinement was 
justified for the purpose in hand.

                          END OF FOOTNOTES

TOBACCO TAX. -- The yield of the tobacco taxes for the 12 months 
February 1929 to January 1930, from the Report of the Commissioner of 
Internal Revenue, was $449.1 million. For the 12 months February 1931 
to January 1932 the yield was $422.8 million. These periods have been 
chosen, thus allowing a lag of one month, because this appeared the 
best rough way of allowing the tax yield to reflect the conditions of 
the calendar years 1929 and 1931. Monthly data for the latter part of 
the 1933-34 period are not at hand as this is written. However, from 
February 1933 to June 1933 inclusive, the yield was $178.0 million. 
For the two periods above, the ratio of the yield during the same 
five months to the year was 41 per cent for the 1929-30 period, and 
44 per cent for the 1931-32 period. If 41 per cent be chosen (the 
latter part of 1933 was more active than the earlier part), the 
calendar year figure for 1933 is $434.2 million. There was no change 
in rate or scope of tax during the period 1929-1933.