Effect of the imposition of a sales tax upon the net value added tax base assuming varying types of shifting of the tax --------------------------------------------------------------------- After imposition Before of sales tax /1/ imposition Tax Tax Tax of shifted shifted not sales tax forward backward shifted --------------------------------------------------------------------- Sales tax base $ 100 $110 $100 $100 Cost of materials and supplies 50 50 45 50 Wages, salaries, interest 40 40 35 40 Profit 10 10 10 0 Net value added tax base: a. Sales tax deductible 50 50 45 40 b. Sales tax not deductible - 60 55 50 --------------------------------------------------------------------- FOOTNOTES TO TABLE /1/ Sales tax assumed to be 10 percent of selling price before imposition of the tax. END OF FOOTNOTES
The producer who can shift the tax to the vendee finds that if the sales tax is not deducted his tax base has increased by the amount of the tax, but the one who shifts the tax backwards finds his tax base has increased by less than the sales tax. In cases where no shifting is possible, the producer finds that his tax base is the same after the tax was imposed as before.
Corporation income and excess profits taxes may or may not be deducted from the net value added base. It seems more practical to compute the net value added tax base before the payment of income taxes. For example, if the scope of the net value added tax covered all forms of business organization it would be impractical to determine the proper deduction of individual income tax paid on business profits in the case of sole proprietorships and partners. Furthermore, the net value added tax is levied on a base composed largely of wages and salaries and, consequently, resembles the payroll taxes. Under present procedure, payroll (and other) taxes are allowable deductions from gross income for purposes of determining normal tax net income. Administrative expediency probably would dictate the same procedure for the net value added tax.
DATA PERTAINING TO TAX BASES AND TAXPAYERS /73/
A. Source of Data
In the definitional section of the memorandum /74/ it was shown that the net value added tax base of any producer would consist of wages and salaries paid, interest paid, profits and entrepreneurial withdrawals, and net rents and royalties received. Business losses would be deductible from the tax base. This concept appears to approximate that used by the National Income Section of the Department of Commerce in defining their estimates of "income produced." /75/
"Income produced" is here used to represent the net value added by the various industrial divisions of the economy because the Department of Commerce data represent the best available approximations to such a concept. One discrepancy, however, between "income produced" and "net value product" arises from the fact that the Department of Commerce conceives net rents and royalties to be a product of real estate and classifies them under "finance." Furthermore, social security contributions of employers are not allocated to industrial groups.
The estimated numbers of business units in the different industrial divisions were pieced together from such diverse sources as Department of Commerce estimates, various censuses, and income tax data.
B. Total Net Value Added
The Department of Commerce's estimate of "income produced" and "income paid out" in 1939 is shown in Appendix Table 1. Income paid out differs from income produced by the extent of business savings or losses. The income produced by governmental units is not included in this table. On the basis of this estimate of income produced, the total possible tax base for a value added tax would seem to have been about $59 billions in 1939.
C. Gross Number of Business Units
According to the National Resources Committee, there were between 10 and 12 million business units during 1937, if one includes farmers and independent professional men. /76/ Table 1 presents an approximation of the number of business units in selected industrial groups. These data were pieced together from a number of sources which are explained in the section on administrative exemptions. The total coincides with the estimate of the National Resources Committee.
D. Administrative Exemptions
If the net value added in the case of goods or services sold for export or to governmental units were to be considered exempt from the tax, the income produced by certain industrial groups would require numerous adjustments to approximate the net tax base. These adjustments could have been made only after intensive time-consuming work. Due to time limitations, these adjustments were not attempted so that the only exemption considered in this appendix is the administrative one.
It was suggested in the text that a dual administrative exemption, based on either size of gross income or size of tax base, be allowed. To compute the effect upon the tax base and number of taxpayers of an exemption based on net value added appeared to be impractical. As a substitute method, several types of gross income (gross sales, gross receipts, and value of products) were used. It was assumed that the proportions of these gross income distributions were directly correlated to hypothetical net value added distributions in the sense that the proportions of the former were representative of the likely proportions in the latter. For example, if in a particular industry, gross income from sales of establishments reporting less than $20,000 annual sales accounted for 5 percent of total sales, it was assumed that such establishments also accounted for 5 percent of the total net value added. A $20,000 gross income exemption was assumed for purposes of illustration.
It must be emphasized that the use of gross income as a standard of exemption results in extreme variation between industries as to the amount of "net value added" removed from the taxable status. The Department of Commerce formerly estimated the "gross income" of selected industrial groups as well as "income produced." Table 2 shows "income produced" as a percent of "gross income" for these industrial groups. It is apparent that, on the average, trading establishments would have to approximate a gross income of $50,000 to have a "net value added" tax base of $5,000, while farms would only have to approximate a gross income of about $10,000 to have the same tax base. Not only is this wide variation between gross income and value added to be expected among industrial groups, but it may also be expected among firms within any one industry. /77/
A. Value Added
In 1939, agriculture was estimated to have produced goods valued at $5,635 millions. /78/
No official estimate is available with regard to the distribution of farm income by size of receipts of the producing units. The 1930 Decennial Census classified farms by size of value of products in 1929, /79/ but the total value of production in each size class was not given. This classification is of course ten years old and was made at a time when farm income was much higher than now but even in 1929 only .4 of 1 percent of the farmers had products valued at $20,000 or over. Just for purposes of illustration, it was assumed that, in 1939, 20 percent of the "income produced" by agriculture was the product of farms with production valued at $20,000 or over. This left about $1,127 millions in the "net value added" tax base.
B. Number of Units
The Census of Agriculture for 1935 reported 6,812,350 farms in this country. /80/ As was mentioned above, the 1930 Census tabulated farms by size of value of products. On the basis of the assumptions that the size distribution of farms was the same in 1939 as in 1929 and that the number of farms was the same in 1939 as in 1935, only about 27,000 enterprises would have been taxable under a net value added tax with a $20,000 gross income exemption.
2. MINING AND QUARRYING
A. Value Added
The Department of Commerce estimated that this industry's income produced in 1939 was valued at $1,210 millions. /81/ To attempt to estimate how much of this sum was produced by enterprises with less than $20,000 gross receipts was rather difficult. STATISTICS OF INCOME data showed that mining corporations with less than $50,000 worth of assets had average total receipts of about $18,000 in 1937. /82/ These corporations earned 2.8 percent of the receipts of all mining and quarrying corporations. /83/ On the basis of this information, and because corporate units are usually larger than unincorporated units, it was assumed that perhaps 3 percent of the total receipts of the mining industry was earned by establishments with less than $20,000 of gross income. If total receipts proportions are applied to the industry total of "income produced," the "income produced" in 1939, coming within the scope of the tax, would have been about $1,174 millions.
b. Number of Units
The total number of mining and quarrying enterprises is not disclosed by governmental publications but it was probably in excess of 25,000. This figure was derived from income tax data. In 1937, there were 13,567 corporations in this industry, /84/ and 1,873 individuals with net incomes of over $5,000 who reported themselves as sole proprietors of such enterprises; /85/ while in 1936, 7,970 partnerships were classified as being in the mining group. /86/ This represented a total of 23,410 enterprises, and since the sole proprietorship data are incomplete, the total number of enterprises may well have been 25,000 or more.
The number of enterprises with gross receipts of less than $20,000 could be approximated only by the use of the STATISTICS OF INCOME data mentioned in subsection (a) above. In 1937, corporations with less than $50,000 worth of assets (which had average receipts of $18,000) represented 42.8 percent of the mining corporations. /83/ Taking this figure to represent mining firms with less than $20,000 gross income reduced the number of taxable units to about 14,000.
3. ELECTRIC LIGHT AND POWER, AND GAS
a. Value Added
All the firms in this industry are corporations. /87/ What percent of the business was done in 1939 by firms with less than $20,000 gross receipts is not known. However, a guess was attempted on the basis of STATISTICS OF INCOME data.
In STATISTICS OF INCOME, electric light and gas corporations are grouped with several other types of companies under the general heading "Transportation and Other Public Utilities." It was assumed that the receipts data for this larger group were representative of the electric light and gas industry. In 1937, public utility corporations with assets of less than $50,000 had average total receipts of about $32,000 and did 3.0 percent of the business of the industry. /88/ In the light of this data, firms doing less than $20,000 of business per annum probably collected only 1 or 2 percent of the receipts of the industry. Nearly all of the "income produced" in 1939 by this industry, $1,384 millions, /89/ would have come within the scope of a net value added tax.
b. Number of Units
In 1937, there were 1,999 corporations in this industrial group. /90/ Because of the technological characteristics of the industry, it is likely that only a few corporations, say not more than a hundred, had less than $20,000 gross receipts. Therefore, there might have been a possible 1,900 taxpayers in 1939.
a. Value Added
According to the Census Bureau, manufacturing establishments producing products valued at less than $20,000 produced only 1 percent of the total products of all manufacturing establishments in 1937. /91/ There are more manufacturing establishments than manufacturing firms, so that less than 1 percent of the production in 1937 was produced by firms with less than $20,000 worth of products. Although "value of products" is not equal to gross sales or gross receipts, it was assumed to be so. On this assumption, and further assuming that the distribution of firms by size of value of products was the same in 1939 as in 1937, the manufacturing tax base might have been reduced by not more than 1 percent or from $15,425 millions /92/ to $15,271 millions.
There were some 184,000 manufacturing establishments in 1939. /93/ In 1937, 30.3 percent of the manufacturing establishments produced products valued at less than $20,000. /94/ Consequently, if the same size distribution prevailed in 1939, 129,000 establishments representing a smaller number of taxpayers would have remained in the taxable group. /95/
A. Value Added
The available data regarding the distribution of receipts in this industry are very meagre. A Census of Construction in 1935 (which was incomplete) tabulated 75,047 establishments /96/ which performed work valued at $1,622,862,000 in that year. /97/ This was an average of about $22,000 a firm, which indicates that most of these units were very small.
Only a guess could be made as to how much of the business was done by firms with less than $20,000 gross receipts. In 1937, construction corporations reported that about 21 percent of their total receipts were earned by firms with less than $50,000 worth of assets. /98/ These small corporations had average total receipts of about $50,000, but since corporations make up a very small number of the business firms in this industry, it might be that 20 percent would not be too large an estimate of the percent of the total business done by firms with less than $20,000 gross receipts. This exemption would have lowered the taxable income produced in 1939 from $2,148 millions to $1,718 millions, if total receipts are considered to be a measure of "net value added."
b. Number of Units
It has been estimated that in the first quarter of 1938 there were about 150,000 enterprises in the construction industry. Of these 150,000 about 100,000 had one or more employees and the rest were self-employed persons. /99/ Almost 40,000 of the employers employed less than 3 persons, /100/ and it appeared quite likely that this group as well as the self-employed persons did less than $20,000 worth of business per annum. This exemption would have removed about 90,000 of the firms from the scope of a value added tax, assuming no change from 1938 to 1939 in the number of business units or the size of the units.
a. Value Added
This industry was estimated to have produced income valued at $4,800 millions in 1939. /101/
There are three sources for the size distribution of gross income in this industry but none is entirely satisfactory. In 1935, the Census of Business covered "Motor Bus Transportation" and "Motor Trucking for Hire." In the case of Motor Trucking, it was found that 30.1 percent of the receipts were earned by concerns receiving less than $25,000 yearly, /102/ while for Motor Buses, 5.3 percent of the receipts were earned by concerns with receipts of less than $25,000. /103/ Corporations in the transportation industry are classified in STATISTICS OF INCOME under "Transportation and Other Public Utilities." This larger group, in 1937, embraced 12,206 corporations with assets of less than $50,000 whose average gross receipts were about $32,000; /104/ and these 12,000 corporations accounted for 3.0 percent of the total receipts of the industry.
The total receipts of transportation corporations were nearly $8 billions in 1937, /105/ while motor bus and trucking firms collected less than $700 millions in 1935. Even considering the fact that business was more prosperous in 1937 than in 1935, and that the Census coverage was incomplete, it seemed unlikely that the bus and trucking firms (many of which were unincorporated units, and which also represented most of the unincorporated units in the transportation industry) could have weighted the receipts of the transportation industry so that more than 3.0 percent of the total receipts was earned by concerns doing less than $20,000 worth of business. This 3.0 percent estimate is probably overgenerous because, as was noted above, the corporations doing that percentage of the corporate business had average receipts of $32,000. It was assumed that these 12,000 corporations were representative of the transportation corporations even though some of them were public utility firms.
In this industry, an exemption of $20,000 would have decreased the "income produced" liable to tax to $4,656 millions.
B. Number of Units
There were 16,375 corporations classified in this industry in 1937. /106/ In 1935, the Census Bureau counted 1,751 bus concerns and 61,216 for-hire trucking concerns, but since 889 of the bus firms /107/ and 3,502 of the trucking firms /108/ were corporations, there were about 59,000 unincorporated units in these two transportation groups. Disregarding the fact that the above figures referred to two different years, these data pointed to the existence of over 75,000 enterprises in this industry.
The Census material omitted taxicab companies and independent cab owners /109/ as well as a large number of truck operators, so that the 75,000 concerns mentioned above represented an incomplete enumeration. According to the Department of Commerce, there were 296,000 entrepreneurs in the transportation industry in 1939. /110/ Taking account of the fact that some of these 296,000 persons were partners, it still seemed possible that there were some 300,000 business units of all types in this industry.
To determine how many of these firms did less than $20,000 worth of business in 1939, more approximating had to be done. In the motor vehicle transportation field it appeared likely, on the basis of the 1935 census data, that about 90 percent of the firms fell in this category because only 5.9 percent of the 61,216 trucking firms and 37.2 percent of the 1,751 bus concerns had receipts in excess of $25,000. /111/ It was assumed, on the basis of the Department of Commerce estimate of 296,000 entrepreneurs that there were perhaps 285,000 unincorporated firms in the transportation industry (most of which were probably in the motor vehicle field) so that a $20,000 gross income exemption might have removed all but 28,000 of these unincorporated firms from the scope of this tax.
The incorporated units which numbered nearly 16,000 in 1937 probably were larger on the average than the unincorporated units. It was assumed that the STATISTICS OF INCOME data for "Transportation and Public Utilities" were representative of the 16,000 transportation corporations. From the distribution of this larger group by size of total assets /112/ it was estimated that about one fourth of the corporations had gross receipts of less than $20,000 in 1937. This lowered the taxable group to about 12,000 (assumed to number the same in 1939 as in 1937).
Adding the 28,000 unincorporated units and the 12,000 incorporated units which may have done over $20,000 worth of business in 1939 gave a total of some 40,000 transportation units likely to have been taxable in 1939.