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November 5, 1948 Chairman Eccles Interim Tax Bill Richard A* Hue grave The Interim Tax Bill has been passed by both Bouses* just thirty days after the presentation of the Treasury recommendations* The Presidentfs signature is expected to follow promptly. Reduction in Yield The changes provided for in the Interim Bill are estimated to reduce liabilities for the calendar year 1946 by nearly $6 billion, more than half of which trill accrue to corporations* A breakdown of the reduction in liabilities by tax sources is shown in Table I* The effeots on the 1946 collections will fall far short of the effects on liabilities, because the cut in corporation taxes applicable to 1946 profits will not affect collections until 1947* Also, the reduction in personal incase tax liabilities will not be fully reflected in collections until 1947* IShereas liabilities for 1948 will drop by nearly #6 billion, the decline in collections will fall short of $2 billion* Collections for the fiscal year 1946 will be affected by less than #1 billion* The immediate inflationary impact of the tax reduction for the transition period is thus less than the overfall cut in liabilities would suggest* The effects of the Bill on the Federal deficit for 1946 and 1947 are shown in Sable II* The deficit for the first half of 1946 Is estimated at #8 billion instead of #6*6 billion under the present revenue actj the surplus for the second half of 1946 is estimated at |200 million as against $1*6 million without rate changes* The corresponding figures for the first half of 1947 are surpluses of $2 billion and #6 billion respectively* These figures, particularly for 1947, are, of course, tentative since they depend greatly upon the level of Income which will be realised* Considering the period from now to the middle of 1947* during which time the gross national product night decline by about #50 billion, the decline In the level of economic activity is likely to produce an even sharper contraction in yield than would be caused by the current rate changes* Major Provisions (1) The most important item is the repeal of the excess profits tax as of January 1, 1946* The provision for the carryback of unused excess profits credits and losses against the tax liabilities of earlier years will continue to apply for 1946 incomes* There was some uneasiness in the Committees that the continued carryback provision may lead to some abuse but no legislative provision was made to curtail them* - 21 (£} Under the corporation tax» the surtax rate for large .^ ^ corporations is reduced by 2 percentage points, lowering the o p i n e d rat* for corporations with net incomes in excess of $60,000 from the y present 40 to 86 per cant* For small corporations with net 1 neeaee under $2S,Q0G, the reduction in the combined normal mad surtax rate y ^ equals 4 percentage point*. Also* the capital stook and declared value excess profits taxes are repealed, effective June $0, 1946• (3) Under the personal income tax, adjustments are In throe partsi (a) Bbrmal tax exemptions* now #600 per person Independent of dependency status, are made equal to surtax exemptions • the rate applicable to each surtax bracket Is reduced by 5 percentage points* The result Is almost identical with that of simply repealing the normal tax* (b) The total personal income tax liability* as computed after these adjustments, is reduced by 6 per cent* The new Income tax liabilities at selected Income levels are shown In table XXI• (o) fax liabilities and service pay ef enlisted men are forgiven and the time period for the payment of deferred taxes by veterans la extended to 5 years* (4) She automobile use tax is repealed* (6) The rate increase in the pay roll tax* scheduled for January 1, 1848 is postponed for one year* legislative History There was general agreement between the Treasury and Congress that this should be an interim bill and that major issues should be Avoided* Hence, difficulties were relatively minor and could be easily dissolved* As far as the total loss of yield (184$ liabilities) itt concerned, the Bill as passed exceeds the original Treasury proposal by 1900 million* The one.major difference* was In the treatment of the excess profits tax. recommended repeal and Ohm Senate Finance CoaBBittee supported the Treasury recommendation, whereas, the Bays and Keens Committee wasted to retain the tax fer one year* Bowwver, the *ay* and Means Committee sho*ed little insistence en its point of view in Conference Ccsmittee* There was no serious Treasury objection to lowering corporation tax rates for small corporations but the Treasury did oppose a flat cut In the corporation surtax rate* Both Congressional committees favored some such reduction* the 2 point reduction which has been passed is a compromise between the Treasury position and the Souse proposal to reduce rates by 4 points* With respect to the normal tax, there is little or no difference between the Treasury recommendation for repeal and the provision of the Bill which substitutes surtax for normal tax exceptions and lowers surtax rates by 9 points* The additional 5 per cent reduction in income tax liabilities provided for by the Bill was opposed by the Treasury* With regard to excises * the Treasury and the House had agreed that the wartime excises should be repealed by the middle of 1946 but the Senate was willing to agree to such repeal only if further adjustments in other excise rates were made* As a compromise* the en* tire excise reduction was omitted, with the exception of the repeal of the autcsaobile use tax* Appraisal In appraising the Bill, it should be clear that some tax reduction at this ttae was Inevitable* As far as the total reduction In liabilities is concerned, there is hardly a major difference between the |S billion as proposed by the Treasury and the #5*9 billion as passed by Congress* particularly if one allows for the fact that immediate effects on collections will be much less than on liabilities* If the Treasury had proposed a smaller reduction, Congress would have followed suit. There was a general feeling in the committees that the actual cuts were more than necessary* The major issue is* of course* whether it would not have been better to retain the excess profits tax for 1946. In view of the posi~ tlon of the Ways and Means Committee * it now appears likely that the tax might have been retained if the Treasury had thus recommended* Most likely* the effects of immediate repeal will do considerable damage to the stabilisation program without substantially speeding up the flow of goods* As far as the remainder of 1945 is concerned* the provision to repeal the tax as of January 1* 1946 may in fact considerably retard production and distribution of goods* It might have been better in this respect to terminate the tax as of Hove&ber 1* The elimination of the normal tax on personal incomes was a proper first step in the downward adjustment of Income tax rates* The additional £ per cent reduction similarly does not seem objectionable as far as its effects on rate structure are concerned* although perhaps it might have been better to make the reduction somewhat more progressive* -4Considering the effects on this revenue bill upon additional revenue changes next year* Its two most Important aspects are the & point reduction in the corporation surtax rate and the failure to out down excises* However* it is interesting to note in this connection that Congressional opinion (including Senator Taft and Representative Knutson) suggests that no further reduction in corporation tax rate can he expected for the next two years, and that »a;Jor emphasis will have to he given to further outs in the personal income tax and to excise reduction* For next year's revenue legislation* the present discussion seems to bring out these pointsi (1) Congress feels that the corporation tax rates should stay "fairly highn or at least that they must look fairly high. Congress will thus not he willing to adopt the CED or Euml schemes which will virtually eliminate the corporation income tax» Fro® the point of view of the general tax structure* I think this is a healthy attitude® (2) The general approach to tax reduction seeias to he to ttmake the gravy go around" tax reductions should he spread* rather than used for a revision of the tax structure on broader economic principles• (S) There seems to he no strong inclination or hurry to bring about a reduction in exoises. If the choice will be between further reduotions in income taxes or in excises* Concessional preference will be for income tax reductions* This is unfortunate but hardly surprising. Attachments 3 TABIM XX m m s m i receipts* and deficit * (In Billions of Dollars) 1948 2nd Ealf 1946 1st Half 1947 2nd Half 1st Half EUH.P. (Annual Rate) 186.1 188.1 175.5 166.6 total Expenditures i/ 40.4 26*8 16.4 14*2 Present Law 19.1 20.2 18.0 20.2 Sew Bill 19.1 18.8 16.2 16.2 Present La^ 21.1 6.6 + l.S * 6.0 Hew Bill 21,1 8.0 *2 * 2.0 Vet Receipts: total Deficitt M Including act of trust account. # The asttaates have heen aade in conjunction with Hiss Coffee. TABLS III PEBSON&L IffCOME TAX LIABILITIES (Harried Person, So Dependents) Net Ineome Before Exemptions Present Law Reduction In > In % 3 3 100 1,000 15 IS 100 2,000 245 190 55 22.4 3,000 475 380 95 20.0 5,000 976 798 177 18.2 10,000 2,586 2,185 400 15.5 15,000 4,695 4,047 648 13.8 25,000 10,295 9,082 1,213 11.8 £0,000 27,585 24,795 2,790 10.1 100,000 69,435 63,127.50 6,307.50 9.1 1,000,000 900,000 839,714*50 60,285.50 6.7 $ 600 § Interim Bill TABLE I REDUCTION IK 1AX LIABILITIES FOR CALESIAH YEAR 1946 (la Millions of Dollars) million dollars Corporation Taxes Repeal of excess profits tax 2*588 Corporate surtax reduction 34? Repeal of capital stock tax 254 3 * 156 Individual Inoo&e Tax Increase in normal tax exemptions Reduction in surtax rates over-all out 782 1*305 569 2*644 Automobile Use Tax* Repeal Total Reduction 140 5,920
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