View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Form F. R. 131

BOARD OF GOVERNORS
or T H E

FEDERAL RESERVE

O f f i c e

C o r r e s p o n d e n c e

TO

Chairman Eccles

Vram

Martin Krost

finhjert;

SYSTEM
Date

September 21+, 19ig

TVia Tte-remne Act of 1Q);!

The Revenue Act of 19Ul i s described in the attached memorandum.
The act as signed by the President d i f f e r s in the following major respects
from the b i l l passed by the House®
1. Personal exemptions under the individual income tax
are reduced from #2,000 to #1,500 f o r married persons and from
$800 to $750 for single persons. Under the lowered exemptions,
from 20 to 25 per cent of a l l income-recipients, -who receive
about half of the national income, -will pay Federal income
taxes.
2* The 10 per cent defense taxes are integrated with the
permanent schedules of individual income, corporation, estate
and g i f t , and excise taxes.
A simplified individual income tax return i s provided
for the optional use of taxpayers with gross income of $3#000
or less.
1+. The rates of corporation surtax are increased from
6 per cent on the f i r s t $25,000 and 7 per cent on the excess,
as provided i n the House b i l l , to 7 ami 8 per cent, respectively.
5» The act as passed eliminates 10 per cent special excess
p r o f i t s tax imposed by the House b i l l on the difference between
average base period earnings and the invested capital credit
f o r corporations using the invested capital option.
6. The Senate eliminated the taxes on soft drinks, outdoor
advertising, and radio broadcasting, and added a tax on l i g h t
bulbs. Of about a b i l l i o n dollars i n additional revenue from
excise taxes, the bulk comes from whiskey, automobiles and
accessories, amusements, a use tax on automobiles, and a new tax
on local telephone b i l l s .
7« The act sets up a committee to investigate the reduction
of non-essential Federal expenditures, consisting of three members
of the House, three members of the Senate, the Secretary of the
Treasury, and the Director of the Bureau of the Budget.
The aggregate additional yield of the act i s estimated at about
§3,600 million on a f u l l year basis at the 19ipL l e v e l of incomes. Total
accruals under the Federal tax structure as modified by the new act . on
a f u l l year basis w i l l be i n excess of $15 b i l l i o n .



Sept©saber 2J, Igill

THE BBVBBOE ACt OF 19i*l
lay
George Jasai
The Bovonue Act o f 19^1 received the signature of the President
on September 20» almost f i v e mouths a f t e r hearings on I t started before
the House Vfeye and Means Consalttee*

Most of t h i s period was occupied by

extended public hearings ax*3 consideration of the legislation by the ?/ays
end Means Committee and Senate Finance Comittee*

Debate on the f l o o r of

the House and Senate was b r i e f and related c h i e f l y to ooismittee proposals
f o r revising the present isathod o f taxing the incoroe o f married persons*
Jh0 present laothod i s l e f t unchanged by the l e g i s l a t i o n as passed, but
t h i s problem

receive consideration again, together with a number of

technical and administrative problems* i n another b i l l upon nhieh the
Ways and Means Cwaaittee *?ill begin work i n a f m weeks*

I t la also ex-

pected that i n the near future the Treasury and other agencies w i l l advance
suggestions f o r increasing payroll taxes currently t o provide increased
social insurance benefits i n the future*

She estimated additional y i e l d o f tho Act* on a f u l l - y e a r basis.
I s shown i n the following table*




Bstlmated Inoroaad or Peoreaso Q

Ovor Yield o f ^roeoxxt Lair I
(Millions of dollars)
^

Ineom taxes t
Corporation!
Soma! tax
Surtax
Excess p r o f i t s tax

~h93<3
7^3*1
1,112,3

Total corporation incase taxes
Individual
Total imam taxes

1,302,1
2,526*7

Miscellaneous internal revenue?
Capital stock tax
Estate tax
G i f t tax
fatal
Maz&facturers sad r e t a i l e r s
excise teas©*
J&scellaneous taxes
Total exeisa and miscellaneous
tos
2/
Jotal xaieoellafloouB internal
revenue

22*3
ll&*6
16*0
179.9
&7»7
1

aU6#8
1,026,7

GRASD S O m 2 /
Cuing t o increased estimates o f defense expenditures* the Revenue
Act *&11 f a l l short o f the freasury f s original objective o f financing twothirds o f expenditures, exclusive o f expenditures under the Lease-lend Act,
out o f taxation,

On a f u l l year basis l e s s than 60 per cent w i l l be so

financed and in the current f i s c a l year only about 50 par cent, r e f l e c t i n g
the lag I n c o l l e c t i o n o f income taxes and the f a c t that increased excise
i/

Treasury Xtepartaaent, Division o f Hesearch afcd Statistics* A l l estimates
she* f u l l year e f f e c t s * Estimates f o r corporation and individual
income taxes aire based on l e v e l s o f ineoas estimated f o r calendar
year 19Ulf e l l other estimates are based on incoiae l e v e l s estimated
f o r f i s c a l year 1$£*2,

2 / Excluding $1*7*5 m i l l i o n mn^recurring floor~stock taxes*




taxes w i l l be in e f f e c t only f o r threo-fourths of the f i s c a l year.

Addi-

tional collections in f i s c a l 19^2 may yiold about 02*0 b i l l i o n , instead of
the f u l l S3.6 b i l l i o n .

The budgetary d e f i c i t on the basis of the latost

available o f f i c i a l estimates -will thus* be reduced from $12.6 b i l l i o n to
about OH b i l l i o n , about twice the d e f i c i t f o r the f i s c a l year 19l*l.
Met Federal expenditures have been running since the end of Juno
at a rate of about $900 million a month, as compared vdth about £300 n i l l i o n
a year ago#

Further expansion i s expected to occur between now and next

March, vfiwn collections of income taxes on 19^1 incomes w i l l begin to be
received.

Betvreen l!arch and the end of the f i s c a l year, increased revenues

attributable to the new act and to increased business a c t i v i t y m i l reduce
net expenditures to currently prevailing l e v e l s , unless the expansion of
defense expenditures exceeds present expectations.

Ket Federal expenditures

at their current rate, together v/ith a large volume of private capital expenditure on plant, equipment, and inventories and heavy buying of consuner
durable goods, have raised ogcrogate consuiser income and expenditures to
levels at vMch the cost of l i v i n g has begun to r i s e .

I t seens unlikely that

the supply of goods available for private purchase con continue to increase
at the rate that has characterised the period since Kay, 19l;0i

Under these

circumstances, although prices w i l l rise less than i f taxes had not been
increased, prices cannot be expected to stop rising or to rice appreciably less rapidly than in recent ^eelis, unless e f f e c t i v e l y checked by price
c e i l i n g s , p r i o r i t i e s * rationing, restrictions on consumer credit, and other
direct governxnental controls*
Excise Taxes
The act xaakes permanent the excise taxes imposed by the Revenue
Act of 1952 and certain excise taxes iisposed by the Revenue Act of 19^1 i t



increases the rat00 of soise existing esciso taxesj and i t irtpococ nor/
excises on a nuxaber of itens*
In the writing of the excise tax sections of the act two opposing
ideas \7ero at work*

Ono view was that excise taxes ehould bo spread as

evenly as possible over the "whole

of commodities, so that no product

should bo unduly handicapped i n relation t o others in competing:
concussers* dollar*

the

The other tme that excise taxes should be restricted

to these commodities usin£ resources needed f o r national defense, in order
to curtail their c i v i l i a n consumption*
represent a cortproirlre»

The ercicee actually imposed

Increased taxes ore imposed on a number of £Ocde

that compete vdth the defense procran,

Hie rates on autcnobilos, trucks,

etc* # on radio receiving sets, refrigerators and air conditioners, t i r e s end
tubes are appropriately doubled,

n w excise taxes are imposed on phonograph

records, rmsicol instruments, e l o e t r i c , gas and o i l appliances, photographic
apparatus, e l e c t r i c siens, business and store machines, rubber products,
conaiorcial washinc Bachinos, e l e c t r i c l i g h t bulbs end optical instmaents.
But the rates of tax inposed — not exceeding, in general 10 per cent of the
price of the a r t i c l e s

appear to be inadequate to reduce consumer den&nd

t o the curtailed supply that w i l l be available.

Unless e f f e c t i v e l y clicked

by direct controls, prices can be expected t o r i s e by considerably sore than
the anount of the increased tax, and the resulting increase of p r o f i t
margins w i l l increase the reluctance t o la&ke the drastic changes in the
patterns of production that nust be nade i f the present schedules of defense
production are t o be Bet,

Horecver, no taxes, or no additional taxes,

M*ere inposed on e number o f a r t i c l e s using scarce xmteri&le, f o r cxsnplo




f I reams, clocks and watches, xo&tol furniture, alundnuia ware, jute products,
o i l cloth, linoleum, and paints end varnishes.

And a number of taxes

-wore inpocod that w i l l make f o r curtailment of consumption not called for by
the defense progress, such as taxes on d i s t i l l e d s p i r i t s , wines, anusomonts,
telephone, telegraph, and radio coa&unicat 1 on&, sporting goods, luggage,
joivelry* and the transportation of parsons *
Corporation Taxes
The act imposes a surtax on corporations; re vinos the excess
p r o f i t s t a x j increases the rates o f capital stock tax; and integrates the
10 per oont defense tax; inpocod by the Ilovonuo l o t of l$hO into the regular
rate structures*
13t0 near surtax on corporate p r o f i t s i s inposod at the rate of
6 per cent on the f i r s t 025#000 of net income and 7
i n excess of that arsount#

cent

on not

incoiae

I t d i f f e r s i n i t s e f f e c t from an equivalent

increase in the noma! tax because i t applies to incorao from p a r t i a l l y
tax oxenpt securities*

Conoereial banks aro more seriously affected by this

feature of the new tax than any other corporate group.
Ho change i s made i n the general fraaev/ork of the excess p r o f i t s
tax under which corporations are allowed to calculate the "normal p r o f i t s "
credit from which excess p r o f i t s arc noacured m t h reference either t o
base period earnings or t o invested capital.

During the fomulation of the

act, the Administration objected to the unrestricted use of base period
earninge as a taeasuro of noraal p r o f i t s on the ground that I t exempts
corporations who have earned excessive p r o f i t s in tho past fron excess




p r o f i t s tax on 95 por cent of an equivalent cnount of currorrfc p r o f i t s .
The rates of exccsc p r o f i t s tax arc increased by 10 porcontnce
points in each brackot as ohovra in the following table*
Kates (per cent)
TOT
isajr

/.mount of Excess P r o f i t s
First £20,000
Kerb
30,000
n
50,000
11
n

ovor

25
50
35

ho

150,000

250,000
500,000

b5

50

h5

50
55
60

The rato of l^eturn allowed on statutory invoetod capital i s
loworod from i t s present l e v e l of 0 par cent t o 7 P®r cant with respect to
invested capital in excess o f 05 million*

The change has limited signi-

ficance, since i t w i l l not a f f c c t corporations v/ho alroady find i t nore
advantage dug to e l e c t the base period earnings ncthod of determining nornal
p r o f i t s , and v/ill not f u l l y a f f e c t corporations who w i l l s h i f t to that
Esothod as a result of the current revisions of the lasr*
the sequence o f determining corporation inccnc ta£ and oztcosc
p r o f i t s tax l i a b i l i t y i s reversed.

Under the esd sting law corporation

normal tax was computed f i r s t and was allo^od as a doduction both in coxaput ing base period oamines and current p r o f i t s subject to excess p r o f i t s
tax*

Under the Bevonue Act of 19kl this cequonce i s reversed*

Corporate

normal tax and surtax i s not allowed as a deduction i n excess p r o f i t s tax
computations but excess p r o f i t s tazos are allowed as a deduction i n determining incoiue f o r normal and surtax purposes*




IThile part of the increased

-7-

yield of the excess p r o f i t s tax under tho now schetse i s o f f s e t by corresponding loss in the yield of tho corporation Income tax* tho rover sol of
deductions results in a substantial increase of the conbinod tax chare©*
For corporations electing tho invested capital option this reversal producos
the ceino e f f e c t on corabinod income and oxoess p r o f i t s tax l i a b i l i t y as
would be produced i f the reversal of deductions had not boon made and tho
"normal p r o f i t s * deduction had boon lowered by about JO per cent*

For cor-

porations eolocting tho base period earnings method, tho equivalent lowering
of the deduction for "noraal p r o f i t s " vrould bo only about 15 por cent, sine©
f o r those corporations tho disallowance of income toxoB as a deduction
produces a higher figure f o r base period earnings that partly o f f s e t s tho
increase in current earnings attributable to tho same factor*

Hie not

o f f o c t on combined tax l i a b i l i t y of reversing tho order of deductions could
have boon approximated, i f the present order had boon l o f t unchanged, by
reducing "aoraal p r o f i t s " under tho invested capital option from 8 por cent
of invested capital to about

per cent, and undor the earnings option

fron 95 por cent of base period earnings to about 60 per cent.

Thus, v/hilo

this particular change increases the conbinod ineons and excess p r o f i t s
tax burden of a l l corporations, i t increases tho relative advantage of corporations that have had high base period earnings and are therefore able to
©loot the earnings option*
Por corporations choosing the invested capital nsthod, the i c t
provides that, vAth rertain restrictions, 125 per cent of equity capital
invested since December 31, 19^1, shall be counted in determining invested
capital*

The .Act




also terminates the exemption from excess p r o f i t s tax of

excess p r o f i t s derived frora the uiuiiig of certain strategic netalo i n the
United States.
Individual Incom Taxes
She act reduces personal oxer^ptionsj increases the rates of surtax*
provides f o r a s t o p l i f i o d xaethod of f i l i n g incoxae tax returns f o r persons
vrhOBo ^ross incono does not oxcood £3*000 and i s derivod T r o l l y from
specified sourcos} i t disallows tlio credit f o r one dopendent i n cases \?hore
tho taxpayer 1 s status as head of f o u l l y i s occasioned s o l e l y by the existence
of one or iaore such dependents* and i t integrates tho 10 per cent defense
tax i n t o the structure of surtax rates*
Personal exe&ptione are reduced from 02,000 t o §1,500 f o r head© of
families and f r o n $000 t o §750 f o r single individuals.

Koraal tax i s l e f t

unchanged at i t s present l e v e l of 1* par cent i n order t o avoid increasing
the value of the tea exemption p r i v i l e g e attaching t o p a r t i a l l y tax exempt
securities.

But rate© of surtax are raised; and surtax isinpoeed on a l l

ixicouo i n excess of personal exemption and c r e d i t f o r dependents, instead
o f exempting, as heretofore, the f i r s t Ci;,000 of such incGoe.
Under tho Revenue Act of 19^0 parried persons earning i n excess
o f §2,222, and single persons earning i n excess of £3G9 bocisao taxable at
a rate of h*h per cent (noraal tax plus defense t a x ) on the f i r s t dollar
i n excess of these suns.

Under tho current act they m i l be taxable at a

rat© o f 6 per cent on the f i r s t d o l l a r i n excess o f $1,500 and 1750,
respectively and taxable at a rate of 10 per cent on the f i r s t d o l l a r i n
excess of 01*667 &nd




respectively*

The follcnvinj table shovrs inccno taxes m & percentage of net
income at various income levels under last year's Revenue jict and under the
Revenue Act of l?ljL, and c o l o r a b l e current figures for the United Eir^dom
raid Canada,
Effective 3gfcoc of Individual Income Tctz
(Uarrioci tazpoyer, no dependents)

Ir.cono
§

2,000
5,000
10,000
20,000
50,000
100,000

United States
Kovonuo Act
l9ko
—

1

r"er cemt

2,2
5*2
11,7
20,3

1&.5

19U1
2,1
7.5
13.1
23.1

ho.O

52.7

United
Eia^doia
25.2
57.1
1*5.0
56.1
72.9

Canada
0,0
20,0
30, Q
ia.7
55.9
61,9

"Soto: Owinc to diiloronce's cowaon the throe countries i n saethode of tcxfng
capital gains and corporate income the porcontr£e f i b r e s given are less
comparable in the hi^xor incase ranges, t?hero incone derived fron cor~
porate source© forms an important part of t o t a l incoxao* Figures roughly
adjusted for these differences indicate that for very large i n c o g s the
gap between tases i n the United States end tho United Kingdom i s rauch
sn&ller than shewn by the tablet

TThile the increase in tax harden under th$ zuw rcvonuo act i s drastic at
levole of Incom up to 0100,000, the incwie te^os paid on such incomes are
s t i l l lovr relative to tazes i n those najor countries ?/here the proportion of
military expenditures to the national incase i s l i t t l e higher than Trill soon
be reached in the United States*

The contrast between our rates end rates

in foreign countries i s especially marked f o r Incosses of less than £20,000*
Estate and G i f t Taxes
Hie g i f t and estate tax rates are increased, and as in the case
of other taxes, the 10 per cent defense tax imposed by the Revenue Act of




-10-

19U0 i s incorporated i n the regular rate structure*

Usenptions and deduc-

tions f o r estate and g i f t tex purposes are l o f t unchanged.

Estates of

§120,000 or loss continue to be able to escape the estate tax entirely
provided taz-freo g i f t s are jsade to the isaxinua allowed by 1 mr and part of
the estate i s l e f t in the forss of te£-froe insurance*

Estates of considerably

larger sise continue to be comparatively l i g h t l y afiectod by these taxes*
Bio following table shows e f f e c t i v e rates of tvx paid by estates of varying
cisos undor existing t a r rates and under the rates of the 19^1 act*
Net estate
before e^erapticn
V

;,evonue i x t
19^0
1$

50,000
100,000
200,000
1400,000
000,000

Ii*6
10*8
15*9
20*9

100,000,000

72*5

1,000,000
10,000,000

22*9
53*2

1*0
s# 5
I9.h
£5*2
29*6

51.1
60*6

75*U

Iflscellaneous Provisions
geo»P on Non-resident Aliens and Foreign Corporations
The Act increases the t s z on non-resident aliens and foreign
corporations, and the rates of -withholding tas at source, by msnn of vdiioh
these tases are l a r g e l y collected.

United States incase taxes on those

taxpayers operate only i f special treaties reducing then are not i n force*
Authorisation i s extended t o conclude such t r e a t i e s with countries of the
Vfestem Hemisphere*
the United States*




Hitherto i t was confined t o countries contiguous to

-11-

Treataaont of Certain Securities for Inco&o Tor, jccountirg
Tho Act provides that a tcospayor reporting on a cash oasis, viio
ovms non-intorest hearing obligations issued at a discount and rodoenablo
f o r f i x e d amounts increasing at stated intervals, nay report cuch incronentc
of value as incoao on cxi accrual basis*

xhic soction i s designed to bono-

f i t holders of non-intorost bccrinc dofonco bonds*

TTith rospoct to short-

term obligations issued on a discount basis by tho Federal, State, or local
governments, the act provides that the issuing discount shall not be
accounted on an accrual basis and that such obligations shall not bo treated
as capital assets*

The main e f f e c t of these provisions i s to simplify

incosae tax accounting*
Hon-essential Federal Expenditures
The Act establishes a coisaittee composed of throe xaenbers each
of the Senate Finance Comitteo, tho Senate Comittee on Appropriations,
the House Ways and iiosixs Coianittee and the House Comitteo on Appropriations,
and the Secretary of tho Treasury and the Director of tho Bureau of tho
Budget, to study tho p o s s i b i l i t y of reducing non-essential Federal escpenditures*

In lino with t h i s provision of the i c t the Senate Finance Coxaaittee

has called upon the Director o f tho Budget to submit a report showing how
non-defence and non-essential budget items may be reduced by alternative
t o t a l s of (1) §1,000,000,000$




(2) $1,500,000,000$

f j ) $2,000,000,000*