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February 15, 1996
Historical Document: 'Facing The Tax Problem'-- Forward And Table Of Contents.
Carl Shoup, Roy Blough, and Mabel Newcomber


====== SUMMARY ======

"Facing the Tax Problem" is a report from the 1930s on tax reform.

====== FULL TEXT ======

[cover page]

FACING THE TAX PROBLEM

THE TWENTIETH CENTURY FUND

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A TWENTIETH CENTURY FUND

INVESTIGATION AND PROGRAM

The Trustees of the Fund approved the plan for this investigation, underwrote its expense and appointed the Special Committee which had charge of the study and drew up the program for action. The Trustees, however, have not assumed responsibility for the factual findings or the recommendations included in this volume.

TRUSTEES

     A. A. BERLE, JR.              MORRIS E. LEEDS
     FRANCIS BIDDLE                ROBERT S. LYND
     BRUCE BLIVEN                  JAMES G. MCDONALD
     HENRY S. DENNISON             ROSCOE POUND
     JOHN H. FAHEY                 CHARLES P. TAFT
     ROBERT H. JACKSON             HARRISON TWEED
     OSWALD W. KNAUTH              WILLIAM ALLEN WHITE

                              OFFICERS

                      JOHN H. FAHEY, President
                      PERCY S. BROWN, Treasurer
                   EVANS CLARK, Executive Director
                   J. FREDERIC DEWHURST, Economist

[no page number]

COMMITTEE ON TAXATION OF THE TWENTIETH CENTURY FUND

The following Special Committee of the Twentieth Century Fund was in charge of the investigation by a special research staff, the findings of which are summarized in Chapters 1 to 26 inclusive of this volume. The Committee alone is responsible for the recommendations for action which are included in Chapter 27.

THOMAS I. PARKINSON, Chairman
President, The Equitable Life Assurance Society

FRANCIS BIDDLE
Formerly Chairman, National Labor Relations Board

HENRY S. DENNISON /*/
President, The Dennison Manufacturing Company

ROBERT MURRAY HAIG
McVickar Professor of Political Economy, Columbia University

ROSWELL MAGILL /**/
Professor of Law, Columbia University

PETER MOLYNEAUX
Editor, The Texas Weekly

EUSTACE SELIGMAN
Of the Firm of Sullivan and Cromwell

/*/ Mr. Dennison was unable to take part in the deliberations of the Committee during which the program for action was formulated.

/**/ Mr. Magill resigned from the Committee on January 17, 1937, because of his appointment as Under Secretary of the Treasury. His consequent inability to sign the report implies neither approval nor dissent.

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FACING THE TAX PROBLEM

A SURVEY OF TAXATION IN THE UNITED
STATES AND A PROGRAM FOR THE FUTURE

Prepared Under the Auspices of the
Committee on Taxation of the
Twentieth Century Fund, Inc.

RESEARCH DIRECTOR
CARL SHOUP
Columbia University

ASSOCIATE DIRECTORS
ROY BLOUGH
University of Cincinnati

MABEL NEWCOMER
Vassar College

New York
THE TWENTIETH CENTURY FUND
1937

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COPYRIGHT 1937 BY THE
TWENTIETH CENTURY FUND, INC.

First published, April 1937
Second printing, November 1937
Third printing, May 1940

Manufactured in the United States of America

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RESEARCH STAFF

     SUSAN S. BURR                 THOMAS J. REYNOLDS
     ROBERT P. FOX                 BERNARD L. SHIMBERG
     C. LOWELL HARRISS             EDWIN H. SPENGLER
     DOROTHEA HIGGINS              PAUL J. STRAYER
     MARION HOLMAN                 WILLARD R. STRONG
     JEAN HAYDEN MULLIKEN          ARNOLD E. SUKROW
     SEYMOUR M. PEYSER             J. WILNER SUNDELSON
     NARNIE L. PURYEAR             H. G. TRENTIN
                     WILLIAM VICKREY

[page ix]

PREFACE

Taxation is obviously one of the leading public issues of the day. This volume is intended, first, to give the general reader an understanding of the tax system as it now exists -- federal, state, and local; and, second, to suggest specific ways by which it can be improved.

The survey has been undertaken by a method which the Fund has used previously in dealing with other issues: through an ad hoc research staff and a special Committee. The committee, whose members are listed on page iv, was appointed by the Trustees of the Fund in October 1935. It has had general charge of the entire undertaking. The research staff, whose names are listed on pages v and vii, presented to the Special Committee a factual and analytical picture of the American tax system, with their own conclusions and recommendations -- included in Chapters 1 to 26 of this volume. The Special Committee studied these findings and, largely on the basis of them, has prepared the series of specific recommendations for action in improving the tax system which are contained in Chapter 27.

The Trustees Of the Fund believe that by this procedure scientific methods can best be applied to the formulation of economic policies. The essential facts are assembled by a staff of economists specially experienced in the particular subject. A committee, representing diverse points of view and chosen on grounds of recognized integrity, disinterestedness and practical experience, takes these facts and, solely in the interest of the general public, proposes concrete measures to deal with problems which the facts disclose.

[page x]

The Committee on Taxation, like other committees of the Fund, came to its task without any preconceived policy as a group, and with widely diverse personal opinions. That its members have reached unanimous agreement on all but two recommendations is evidence both of their determination to deal with facts objectively and of the validity of the program they propose. This procedure is refreshing and should be genuinely corrective, in a world which is played upon so often by the partisan propaganda of special interests.

In presenting this volume to the public the Trustees and officers of the Fund are glad to express their appreciation of the unselfish labor which the members of the Committee have put into this project. Special appreciation also goes to the staff which, with great patience and in the best traditions of disinterested research, has dealt with exceedingly complex and intractable material.

The facts summarized in this volume have been drawn largely from the published records of previous research. In some instances, however, the staff was obliged, by the lack of available data, to undertake its own original studies. The detailed results of these special investigations are contained in a separate volume entitled Studies in Current Tax Problems, soon to be published by the Fund, and in articles to be published in scholarly journals.

EVANS CLARK, Executive Director
The Twentieth Century Fund

330 West 41d Street
New York City
March 1, 1937

[page xi]

FOREWORD

BY THE DIRECTOR OF RESEARCH

This foreword serves to give a general expression of appreciation for the helpful assistance rendered by the large number of persons who at one time or another came in contact with the work. It also indicates, through a statement of the major contributions of the associate directors, members of the research staff, and others, how much the project has been the result of cooperation.

Professor Roy Blough and Professor Mabel Newcomer, as associate directors, in addition to participating in the planning of the volume and in the critical analysis of all the manuscript, have each contributed several chapters. Professor Blough wrote the chapters (Chapters 9-14) dealing with the tax system as an instrument of social control. Professor Newcomer wrote the chapters on expenditures (Chapter 7), distribution of the tax burden (Chapter 16), and intergovernmental tax relations (Chapter 24). Both joined in writing the conclusions and recommendations in Chapters 25 and 26.

The organization of the office force and the editing of the manuscript for matters of style were handled by Mrs. Cranston Holman, who was assisted, in the first task, by Miss Dorothea Higgins.

The other members of the research staff contributed basic memoranda. Their contributions will be noted in detail, and some of them will be reproduced in full, in the forthcoming companion volume, Studies in Current Tax Problems. Memoranda cited without reference to that volume (see for example page 64) will be made available

[page xii]

either through publication in journals or in mimeograph form.

The staff has been fortunate in the assistance that it has received from the many persons who gave freely of their time and effort. Only a brief statement of acknowledgment to a few of these is possible here. Professor Edwin R. A. Seligman was specially generous in reading the manuscript in both the preliminary and the later stages. The members of the Special Committee, whose names appear on page iv, assisted by giving detailed comments in the course of the committee meetings and at other times. I particularly appreciate the opportunity to express my indebtedness to Professor Robert Murray Haig, whose advice and encouragement, both in the past and during the present work, have been fundamental to the development of the research in this survey. Thanks are also due to Dr. Louis Shere for many important improvements made as a result of his comments after reading the manuscript in proof.

The numerous and extremely helpful suggestions on both form and content made by Mr. Evans Clark, Director of the Twentieth Century Fund, resulted in extensive revisions. Dr. Frederic Dewhurst, Economist of the Fund, also assisted by a close reading of the entire manuscript. Many valuable suggestions for form in preparation for printing were made by Miss Elizabeth Mann, Publications Associate of the Fund.

The tax officials of the various governmental jurisdictions again exhibited that willingness to supply information and to comment on preliminary drafts that is one of the most encouraging signs for the future of tax research in the United States. Business organizations and individuals were likewise helpful in their responses to inquiries. The results of the cooperation from these groups will be particularly evident in Studies in Current Tax Problems. Acknowledgment is made to Columbia

[page xiii]

University for its generosity in providing working space for the
staff.

In no case, of course, does any responsibility for statements of fact or opinion in the staff's report attach to those who assisted us in the ways just noted. Moreover, the statements in Chapters 25 and 26 reflect only the opinion of the three directors of research, and the other members of the staff bear no responsibility for that section of the report.

CARL SHOUP, Director of Research

Columbia University
New York City
March 1, 1937

                              [page xv]

                              CONTENTS

                                                           Page

LIST OF TABLES                                              xxi

LIST OF CHARTS                                            xxiii

                        Book One. BACKGROUND

CHAPTER 1. INTRODUCTION                                     3
     Tax Reform                                             4
     A Catalogue of Complaints                              4
     How the Volume Has Been Planned                        7

CHAPTER 2. THE AMERICAN TAX SYSTEM: 1937                    9
     Property Tax                                          10
     Income Tax                                            13
     Payroll Taxes                                         17
     Highway Taxes                                         18
     Liquor and Tobacco Taxes                              19
     Sales Tax                                             20
     Death Taxes and Gift Tax                              22
     Customs Duties                                        23
     Miscellaneous Taxes                                   24
     Federal-State-Local Tax Relations                     25

CHAPTER 3.  CHANGES SINCE 1914                             28
     The War Days                                          28
     The Period of Prosperity                              35
     Depression                                            41

CHAPTER 4. TESTING THE TAX SYSTEM                          48
     The Process of Judging a Tax System                   48
     Tests to Be Made                                      50

                         Book Two. ANALYSIS
                        PART I. PRIMARY AIMS
                         Section A. Revenue

CHAPTER 5. TAXABLE CAPACITY                                57
     Non-Economic Limits to Taxable Capacity               57
     Economic Limits to Taxable Capacity                   59

                             [page xvi]

CHAPTER 6. REVENUE YIELDS: PRESENT AND FUTURE              69
     Nature of the Estimates                               69
     Federal Taxes                                         70
     State and Local Taxes                                 91

CHAPTER 7. EXPENDITURES ESTIMATED TO 1940                  94
     Problem of Estimating Expenditures                    94
     Past Expenditures: 1920-35                            99
     Estimates of Future Expenditures: 1936-40            104

CHAPTER 8. COMPARISON OF REVENUES AND EXPENDITURES        121
     Expenditures                                         121
     Revenues                                             122

                      Section B. Social Control

CHAPTER 9. TAXATION AS AN INSTRUMENT OF SOCIAL CONTROL    129
     Non-Revenue Aspects of Taxation                      129
     The Operation of Tax Pressures                       132
     Constitutionality of Taxation for Non-Fiscal
          Purposes                                        135
     Other Limitations on Taxation for Non-Fiscal
          Purposes                                        140

CHAPTER 10. PROMOTION OF SPECIFIC INDUSTRIES              141
     The Protective Tariff                                141
     Special Internal Taxes                               144
     Tax Exemptions                                       147

CHAPTER 11. CONTROL OF BUSINESS ORGANIZATION AND
     PRACTICES                                            153
     The Size of Business Units                           153
     Incorporated and Unincorporated Business             155
     Corporation Dividend Policies                        168
     The Holding Company                                  176
     Chain Merchandising                                  182

CHAPTER 12. OTHER INDUSTRIAL CONTROLS                     188
     The Control of Speculation                           188
     Taxation and the Enforcement of Industrial Code      191
     Taxation and the Control of Labor Relations          192

CHAPTER 13. CONTROL OF CONSUMPTION OF HARMFUL COMMODITIES 195
     Narcotic Drugs                                       196
     Alcoholic Liquors                                    197

CHAPTER 14. TAXATION AND THE DISTRIBUTION OF WEALTH AND
     INCOME                                               203
     Inevitable Effects on Distribution                   203
     Methods of Changing Distribution                     204
     Incidental versus Intentional Effects                206

                             [page xvii]

     Redistribution as a Tax Objective                    207
     The Limits of Redistribution                         211

                      PART II.  SECONDARY AIMS

                       Section A. Tax Justice

CHAPTER 15. THE NATURE OF TAX JUSTICE                     217
     The Concept, Tax Justice                             217
     Common Objectives                                    218
     Difficulty of Knowing How Burden Is Distributed      219

CHAPTER 16. THE DISTRIBUTION OF THE TAX BURDEN            221
     The Cases Selected                                   222
     The Taxes Included                                   224
     Assumptions on Which Estimates Are Based             225
     The Tax Burden Estimates                             225
     Tax Burdens as Percentage of Incomes                 229
     Discussion of Estimates                              231

CHAPTER 17. PAST EVENTS AND PRESENT JUSTICE               238
     Reduction in Property Value through Tax
          Capitalization                                  238
     Effect of Special Taxes on Volume of Sales           245
     Innocent Vested Interests                            249

CHAPTER 18. BENEFIT CHARGES AND TAX JUSTICE               255
     Differences in Wealth and Income                     256
     Benefit Charges in the Existing System               257

CHAPTER 19. TAXATION OF SOCIALLY UNDESIRABLE GAINS        271
     Characteristics of Taxes on Socially Undesirable
          Gains                                           273
     The Concept, Excess                                  274
     The Definition of Excess Profits                     278
     Special Taxation of Land                             290

CHAPTER 20. ADJUSTMENT TO PERSONAL DIFFERENCES            294
     Property Tax                                         294
     Personal Income Tax                                  300
     Taxes on Business Income                             306
     Death Taxes                                          311
     Gift Taxes                                           315
     Taxes on Commodities and Services                    317
     Personal Status and Ability to Pay                   320

               Section B. Degree of Revenue Stability

CHAPTER 21. DEGREE OF REVENUE STABILITY                   322
     Cyclical Fluctuations                                322
     Effect of Rapidly Rising Prices                      329

                            [page xviii]

                  Section C. Ease of Administration

CHAPTER 22. EASE OF ADMINISTRATION                        336
     Cost of Administration                               337
     Cost of Compliance                                   341
     Taxpayers as Tax Collectors                          342
     Basic Factors in Tax Administration                  346

                    Section D. Tax Consciousness

CHAPTER 23. TAX CONSCIOUSNESS                             352
     Direct Taxpayers                                     352
     Indirect Taxpayers                                   360
     Other Causes of Tax Consciousness                    362

             Section E. Intergovernmental Co-ordination

CHAPTER 24. INTERGOVERNMENTAL CO-ORDINATION               365
     The Conflict of Jurisdictions                        366
     Obstacles to Co-ordination                           368
     Possible Methods of Co-ordination                    371
     Recent Developments in Co-ordination                 374
     Relative Merits of Different Adjustments             383

              Book Three. CONCLUSIONS. RECOMMENDATIONS

CHAPTER 25. GENERAL CONCLUSIONS                           391
     Relation to Books One and Two                        391
     The Tax Student and Tax Policy                       392
     Conclusions                                          393

CHAPTER 26. SPECIFIC RECOMMENDATIONS                      429
     I. Income Tax                                        429
    II. Property Tax                                      431
   III. Death Taxes and Gift Taxes                        433
    IV. Excess Profits Tax                                433
     V. Business Taxes                                    434
    VI. Taxes on Specified Commodities and Services       434
   VII. Sales Tax                                         434
  VIII. Tariffs                                           435
    IX. Postal Rates                                      435
     X. Administration                                    435
    XI. Intergovernmental Relations                       436

                 Book Four. REPORT OF THE COMMITTEE

CHAPTER 27. REPORT OF THE COMMITTEE                       439
     I. Facing the Tax Problem                            439
    II. Revenues versus Expenditures                      441

                             [page xix]

   III. Federal-State-Local Tax Relations                 446
    IV. Personal Income Tax                               451
     V. Sales Tax                                         460
    VI. Undistributed Profits Tax                         463
   VII. Capital Gains and Losses                          484
  VlII. Excess Profits Tax                                491
    IX. Social Security Taxes                             494
     X. Death Taxes and Gift Tax                          500
    XI. Chain Store Taxation                              502

                     NOTES. BIBLIOGRAPHY. INDEX

NOTES                                                     509

BIBLIOGRAPHY                                              582

INDEX                                                     593

    [NOTE: pages 439 - 593 are not reproduced in Tax Notes Today]

                             [page xxi]

                           LIST OF TABLES
                                                               Page
1. Personal Income Tax Rates at Certain Levels, 1916-18         30
2. Personal Income Tax Rates at Certain Levels, 1918-26         36
3. Relative Importance of Certain Federal Taxes, 1925-32
      and 1916                                                  39
4. Estate Tax Rates at Certain Levels, 1926-35                  44
5. Relative Importance of Federal Taxes, 1913, 1936             45
6. Surtax Rates Used in Estimates of Yields                     73
7. Estimated Yield of Personal Income Tax on Various
      Assumptions                                               74
8. Estimated Yield of Personal Income Taxes Under Various
      Plans for Taxing Capital Gains and Losses                 83
9. Estimated Yield of Corporation Normal Tax and Surtax         84
10. Estate Tax Rates Used in Estimates of Yields                87
11. Estimated Yields of Federal Estate Taxes on Various
       Assumptions                                              87
12. Yield of Federal Taxes, Fiscal Years 1934-37                88
13. Net Expenditures Payable from Federal, State, and Local
       Revenues, 1920, 1925, 1930-35                           100
14. Total Expenditures, Actual (1930, 1935, 1936) and
       Estimated (1937-40) on First Functional Basis           107
15. Federal Government Expenditures, Actual (1930, 1935,
       1936) and Estimated (1937-40) on First Functional Basis 108
16. Total Expenditures, Actual (1930, 1935, 1936) and
       Estimated (1937-40) on Second Functional Basis          111
17. Total Expenditures, Actual (1935, 1936) and Estimated
       (1937-40) on First Trend Basis                          115
18. Total Expenditures, Actual (1935, 1936) and Estimated
       (1937-40) on Second Trend Basis                         117
19. Comparison of Estimates of Federal, State, and Local
       Expenditures, 1936-40                                   118
20. Assumptions on Which Tax Burden Estimates Are Based        226
21. Taxes Paid Directly to Government Officials Whether or
       Not Shifted to Others: Based on Assumptions in Series 1 228
22. Taxes Paid as Such to Government Officials or Intermediate
       Agencies, and Not Shifted to Others: Based on
       Assumptions in Series 1                                 229
23. Taxes Borne as the Result of Shifting: Based on
       Assumptions in Series 1                                 230
24. Total Tax Burden: Based on Assumptions in Series I         230

                             [page xxii]

                                                               Page
25. Total Tax Burden, Federal, State, and Local: Based on
       Assumptions in Series I, II, III, IV, and V             231
26. Total Tax Burden, Federal, State, and Local, as Percentage
       of Potential Income                                     232
27. Yield of Certain Federal Taxes Sensitive to Recent
       Cyclical Fluctuations, 1925-36                          324
28. Yield of Certain Federal Taxes Not Sensitive to Recent
       Cyclical Fluctuations, 1923-37                          325
29. Cyclical Stability and Secular Trend of the Adjusted Yield
       of Certain Taxes                                        326
A. Major Federal Revenue Acts, 1929-36                         510
B. Federal Tax Revenue, 1913-37: Internal Revenue and
      Customs                                                  515
C. Federal Income Tax, Excess Profits Tax, Estate Tax, and
      Gift Tax, 1913-37                                        516
D. Federal Liquor Taxes, 1913-37                               520
E. Federal Tobacco Taxes, 1913-37                              522
F. Federal Taxes on Capital Stock, Admissions, Capital Stock
      Transfers, and Gasoline and Other Automotive Products,
      1913-37                                                  524
G. Tax Rates and Assessed Valuations in Cities over 30,000 in
      the United States, 1929-36                               526
H. Urban Tax Rates, 1932-33, in Ten Largest Cities             527
I. Urban Tax Rates, 1932-33, in Second Ten Largest Cities      528
J. State Tax Collections, Including Local Share, 1936          530
K. State Tax Collections, Excluding Local Share, 1936          534
L. Estimate of Local Expenditures                              540
M. Estimated Number of Taxable Individual Returns for 1933
      with Net Income under $5,000 for Various Personal
      Exemptions and Earned Income Credit Provisions by
      Income Classes. Taxable Returns Only                     574
N. Estimated Total Number of Potential Federal Individual
      Returns for the Income Year 1933 with Net Income
      Above Certain Exemption Levels. Both Taxable and
      Non-taxable Returns Included                             575
O. Federal and State Revenues Distributed to Underlying
      Jurisdictions, Selected Years, 1902-35                   576
P. State Tax and Grant Revenue, Selected Years, 1902-35        576
Q. Sources of Local Revenue, Selected Years, 1902-35           577
R. Local Share of State-Administered Taxes, Selected Years,
      1902-36                                                  578
S. State Grants-in-Aid, Selected Years, 1902-35                579

                            [page xxiii]

                           LIST OF CHARTS

                                                               Page
Chart 1. Sources of Tax Revenue in the United States, 1937       1
Chart 2. States Imposing the Income Tax, January 1, 1937        15
Chart 3. States Imposing the Sales Tax, January 1, 1937         21
Chart 4. Total Expenditures from All Sources, Functional
            Estimates, 1930, 1935-40                           112
Chart 5. Total Federal, State, and Local Expenditures from
            All Sources, All Estimates, 1935-40                119
Chart 6. Tax Burden, Percentage of Potential Income Paid in
            Taxes, Series IV Assumptions                       233

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