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BOARD • F GOVERNORS
FEDERAL RESERVE SYSTEM

Office

prom

C o r r e s p o n d e n c e
Chairman Eccles
^
Vl
Mr. Mu sgrave
«» M «

Date_ggcember i, 19kz
S n h j e r t : Thq Wartime Tax Effort in the
United States, the United Kingdom and
Canada,

The following is a brief summary of the attached study of the
comparative tax effort in the United States, the United Kingdom and
Canada:
I.

The Over-All Picture

The tax effort of the United States lags substantially behind
that of the United Kingdom and Canada.
IHhile central government expenditures as a percentage of gross
national output are somewhat larger in the United States than in Canada
and smaller than in the United Kingdom, tax receipts in the United States
cover only J8 per cent of expenditures compared with
per cent in
Canada and 51 per cent in the United Kingdom. Total taxes (at all levels
of government) as per cent of national income are 31% ^or the United
States, as against
for Canada and 1|2% for the United Kingdom. (See
Chart I and Table I.)
Per capita taxes are highest in the United States, but a comparison on this basis is quite misleading. (See page 2.)
In terms of increases over prewar levels of taxation, the
United States again lags behind despite the fact that its prewar level
was comparatively low. Canada1 s increase has been by far the largest,
but that of the United Kingdom is equally impressive in view of the high
level of British prewar taxation.
II•

Changes in the tax structure.

Changes in the tax structure in the three countries appear to
have been influenced largely by prewar levels of taxation. In the United
States and Canada most of the additional war revenue has been obtained
from taxation of individual and business net income, while in the United
Kingdom the already high levels of excise and income taxes necessitated
an equal extension of both these sources. (See Chart II and Table II.)
Ill.

Taxes on individual incomes.

Individual income taxes are much higher in Canada and in the
United Kingdom than in the United States for all levels of income except
for large families in the very lowest income group, due to the low exemptions under the Victory Tax. (See Chart III and Table III.)
If adjustments are made to allow for the individual1 s share of
the corporation income tax in Canada and in the United States, Canadian
income tax liabilities become by far the heaviest for the great majority




2

of taxpayers. Although the additional burden is considerable in the
United States, the effective rates still remain far below those of the
other two countries, (See Table IV.)
The increase in income tax liabilities (including Federal as
well as State and Provincial taxes) in Canada has been by far the steepest. The increase in the United Kingdom has been greater for all income
levels than in the United States, notwithstanding the fact that the level
of British income taxes before the war was very much higher. (See
Table V.)
IV.

Taxes on Business Net Income

Although increases in taxes on corporate income were drastic
in all three countries, available data show that profits after taxes
doubled from 1939 to 1943
the United States, remained practically
stable in the United Kingdom and seem to have risen by about I. per
4O
cent above the prewar level in Canada.
V.

Excise Taxes

Ihile the severity of excise taxes in the three countries is
difficult to measure precisely, a comparison of the rates applicable to
various types of commodities indicates a substantially higher level in
Canada and the United Kingdom than in the United States. In addition to
excises, both Canada and the United Kingdom levy a general Federal sales
tax. (See Table VI.)

The evidence shows that the over-all tax effort in the United
Kingdom and in Canada is substantially greater than in the United States,
and that ea.ch of the three main tax sources has been drawn on more intensively in the two other countries.




NOT FOR PUBLICATION
Current Comments
November 30, 19U3
THE YJARTItffi TAX EFFORT IN THE UNITED STATES, TEE UNITED KINGDOM AND CANADA*
by
R. A. Musgravo and H. L. Selignan
The rolo of financo in a war economy is secondary to tho task of obtaining
the maximum output of war materials. Tho linits of production arc sot by tho scarcity
of resources and tho people's willingness to forego civilian consumption; they aro
not sut by tho Government's ability to moot the bill. If tho necessary funds cannot
bo obtained through taxation or borrowing fron the people, they can air/ays bo obtained through borrowing fron tho banks. Yet, the methods of war finance arc of
vital importance; they boar diroctly upon war production, they largely determine tho
distribution of the economic burden of the war, and they shapo tho economic conditions after the war.
•Thilo it is not feasible, politically or economically, to cover the entire
cost of the war by taxation* it is generally agreed that taxation should cover as
largo a share as possible without imposing gross inequities and impairing productive
incentive. If an all-out tax effort is made, war finance is a powerful moans of adjusting incomes to available civilian supplies; if extensive rolianeo is placed on
free market borrowing, particularly on borrowing from the banks, war finance turns
into a source of aggravated inflationary pressures. Squally important, an all-out
tax effort during tho war reduces tho financial difficulties of the postwar period.
There is thus good reason for appraising the financial performance of a nation at
war in terms of its tax effort.
This paper is designed to obtain some perspective on the tax effort of the
United States by comparing it with that of the United Kingdom and Canada. The findings are as follows;
1. The present over-all level of taxation is highest in the United Kingdom and
lowost in tho United States. The increase in the general level of taxation over
the prewar level was substantially greater in Canada and the United Kingdom than
in the United States.
In the United Kingdom, the relative importance of excise and income taxes
remained about tho some, while in the United States and, to a lessor extent, in
Canada tho relative importance of income taxes increased while that of oxciso
taxes doereasod.
Personal income taxes in tho United Kingdom and in Canada are much higher
than in the United States. This picture remains basically the same, although
it is modified somewhat, if the comparison is drawn between taxes net of refunds
and if adjustments are made for differences in tho treatment of dividend incomes.
The dollar increase in tax liabilities, moreover, was by far the steepest in
Canada. British rates, although much higher before the war, increased more than
did rates in the United States.
I. Corporation profits after tax rose steeply above their prewar level in tho
4.
United States, less steeply in Canada, and remained unchanged in the United
Kingdom.

*Prosented in part as an address before tho National Tax Conference, Chicago,
Novembe r 22. 19h3 •



-2-

Hot for Publication

5. The level of sales raid oxciso taxes is substantially higher in tho United
Kingdom and Canada than in the United States.
In assessing those conclusions, it must be recalled that taxation is but a
part of total war finance. It is the volume of Government expenditures, not the volume of taxes that indicates the share in total output devoted to war purposes. The
adjustment of civilian incomes to available civilian supplies comes about as the result of changes in the rate of savings and in prices as well as through additional
taxes. A more complete analysis of all financial sources of war production, however,
falls outside the limits of this paper which is concerned with taxation onlyf 1/
I.

The Over-All Picture

The tax effort of three countries differing as groatly in economic capacity
as tho United States, the United Kingdom, and Canada cannot be compared in terns of
dollars of tax collection. The fact that receipts in the United States are IS times
as large as those in Canada tells nothing about relative tax efforts.
Equally misleading is a comparison in terms of dollars of per capita tax
payments, since per capita payments cannot reveal the degree to which taxpayers havo
had to lower their standards of living or the amount of income, absolutely or percentagewise, which they retain after paynont of taxos» 2{
To obtain a significant comparison, tax collections must be measured relative to other economic dimensions of tho respective countries. A first stop is to
compare the extent to which war expenditures have been mot by taxation. Since war
expenditures meio up 90$ or more of wartime budgets and cannot readily bo distinguished from other outlays, taxes have been computed as a percentage of total Government expenditures. (Taxes and expenditures of'tho central governments only are included in this comparison.)
Taking tho aggregate of tho first three years of the war--tho fiscal years
19l*l to 1 l - for the United Kingdom and Canada, and the fiscal years 19i|2 to I9I4I4. for
9;3
tho United Status--we find Canada covoring 57$ of it:: expenditures by taxation, followed by tho United Kingdom with L\£>% and the United States with 35$. Looking at tho

1/ A tax comparison of this kind has certain limitations, arising from basic differences in tho economies under comparison, such as differences in purchasing power and
income distribution, as well as from differences in taxation techniques. Some of
these differences, however, do not greatly affect the over-all picture, or can be adjusted for. Those remaining should be kept in mind in interpreting cur conclusions.
2/ Per capita tax paynonts in the United States are $360 for the fiscal year 19W+*
as against 025& i n the United Kingdom and 0211 in Canada for the fiscal year 19U3*
But at the sane time, per capita incomes in the throe countries arc ()1,151, £>6^9 and
§570 respectively. Per capita taxes as c percentage of per capita incomes are (equal
.
to the over-all tax to incomo ratio discussed below) thus 1|2$ in the United Kingdom,
37$ in Canada and
in tho United States. Surely, this latter comparison is more
significant than the former.




CHART

I

GOVT EXPENDITURES. TAXES, AND NATIONAL INCOME
UNITED STATES, UNITED KINGDOM, AND CANADA
EXPENDITURES (CENTRAL GOVERNMENT)

PER CENT

PER CENT

PERCENTAGE OF GROSS NATIONAL PRODUCT

80

80

TAX RECEIPTS (CENTRAL GOVERNMENT)
PERCENTAGE OF EXPENDITURES (CENTRAL GOVERNMENT)

100

100
80

80

I

60
40

f f

20

60

n
m

40

20
TAX RECEIPTS (CENTRAL AND LOCAL)
PERCENTAGE OF NATIONAL INCOME

60
40

i
3EsARSl 1940 1941 1942 1943 1944




UNITED STATES

v

n

i

i

1939 1940 1941 1942 1943
UNITED KINGDOM

_ _ „

i 1

1939 1940 1941 1942 1943 years'
CANADA

TABLE I
HATIONaL INCOME, TAXES AND GOVERNMENT EXPENDITURES

(Fiscal Year)
. 1938-39 j 1939-40 ! 1940-41 j 1941-42
'
United
1.
2.
3.
4.

States
Gross National Product
National Income
Taxes, Central and Local
Government Expenditures, Central

United
5.
6.
7.
8.

Kingdom
Gross National Product
National Income
Taxes, Central and Local
Government Expenditures, Central

22,100

Canada
9.
10.
11.
12.

Gross National Product
National Income
Taxes, Central and Local
Government Expenditures, Central

Taxes as Percent of National Income
13. United States
14. United Kingdom
15. Canada
Gove rumen-1 Exp end i ture s as
Gross National Product
16. United States
17. United Kingdom
18. Canada

For explanation of items see page 11.




1942-43 ! 1943-44

(Millions of U. S. Dollars)
92,600
106,000
133,000
172,100
84,500
74,100
106,400
135,100
16,900
14,400
23,000
32,400
32,400
12,700
9,000
78,200
30,300
24,200
7,700
15,700

34,500
27,000

5,800
5,100

27,000
21,700
5,800
7,700

19,300

37,800
29,500
12,400
22,700

5,300
4,300
900
500

5,400
4,300
900
600

6,200
4,800

7,500
5,700

8,800
6,600

1,700

2,400
4,100

26.2

19.4
26.7
20.9

198,000
157,000
49,100
104,000

27,500

1,200
1,100

10,600

1,800

(Percent)

20.9

18.5
9.4

9.7
28.5

11.1

20,0

21.6

31.8
25.0

39.3
31.6

12.0

24;4
55.9
22.7

51.8
17.7

24.0
42.0
36.4

31.3

45.4

52.5

60.1
46.6

-3-

Hot for Publication

most recant year available (19UU for the United States raid Vjix5 r the other two
countries) wo find the United King don in the load with r)l%, followed by Canada with
b 9 o and the United States with
,/
A more detailed picture is given in Chart I and
Table I. Here, as throughout this paper, pound sterling and Canadian dollar figures
are converted into U. S. dollars at the official exchange rrtes. l/
The ratio of taxes to expenditures, however, has only United significance,
since the effort required to cover a given portion of war expenditures by taxation
depends on the size of war expenditures relative to total output. This relationship
is also .shown in Table I and Chart I. For the latest year available, central Government expenditures as a percentage of total output (the gross national product) amount
to 60$ in the United Kingdom (fiscal year 1943), 52% in the United States (fiscal
year 19^), aid kl% in Canada (fiscal year Vyb3). England, by this standard, is making the greatest effort, since it covers the largest portion of its war expenditures
by taxation and also absorbs the largest percentage of total output in Government expenditures. The picture is loss clear with respect to the United States and Canada.
The United States absorbs the larger share of total output in Government expenditures
but covors a smaller portion of its expenditures by taxation. To obtain a noro complete picture, a comparison must bo drawn between taxes and total output.
The war has exploded traditional economic magnitudes of all kinds, but most
dramatic has been the vast expansion in output—particularly in the United States,
but also in Canada and the United Kingdom. The gross national product in current
prices has more than doubled over its 1939^0 level in the United States; that of
Canada has increased by 70%, and that of the United Kingdom by
In part this reflected a rise in prices, but the increase in terns of constant prices was still very
groat. This factor alone would have resulted in an enormous increase in tax receipts
even though no changes in tax rates had been nade. But in addition, tax rotes in all
throe countries have been increased sharply and now levies have been imposed. The
result, also shown in Chart I and Table I, was that all three countries experienced a
substantial increase in the portion of national income absorbed by taxes. 2/ State
and local, as well as Federal taxes, are included in this comparison. The United
Kingdom, maintaining the lead throughout, took up bgfo (fiscal year 19h3)
its
national income in taxes as compared to 36/5 for Crnada (fiscal year 19U3) and an
estimated 31% for the United States (fiscal year 19w).
"Tf conversion at the official exchange rate is far from satisfactory. For purposes
of a tax comparison, foreign currency should be converted into United States dollars
at rates reflecting the relationship between the dollar's purchasing power to the
American taxpayer and the purchasing paver of the foreign monetary unit to the foreign
taxpayer. But in absence of such a "true" conversion rate, which can hardly be estimated under prevailing conditions, the exchange rate has to be used. With respect to
the countries here under consideration, the resulting distortion is not likely to be
serious.
2/ To avoid confusion, wo follow the customary practice of comparing tax collections
with national income, although, in some respects, it would seen preferable to draw
the comparison with the gross national product. The over-all picture is the same
under either approach.




Not for publication
Apart from tho level of taxation reached, the question nay be ro.ined how
sharp the increase has been in the three countries, As may be expected, the percentage increase in tax collections was greatest whore the tax base, or the national incone increased nest, that is in the United States, and it was least whore the increase
in the tax base was smallest, that is in the United Kingdom. To measure the wartime
tax effort, however, we should not compare the percentage increase in taxes but the
changes in the ratios of taxes to income0 The percentage increase in taxes may be a
reflection, who-lly or in part, of the buoyancy of an increased level of income, while
the effect of an increased base is largely eliminated when tax to income ratios are
compared. \J
Canada and the United States, which prior to the war collected about 2 0 f o of
their national income in taxes, (central and local) increased this ratio to y6 and
315S respectively, while the United Kingdom, which -started tho war with tho higher
ratio of 26% achieved an increase to l\2%. Yftiilo the percentage increase in the tax to
income ratio was sharpest in Canada and about equal in tho United Kingdom and the
United States, it should bo noted that the prewar level of taxation in the United
Kingdom was by far the highest and that additional increases in the tax to income
ratio become the more burdensome tho higher the level already reached.
To summarize the over-all picture: With respect to tho present over-all
level of taxation, it is clearly highest in the United Kingdom and lowest in the
United States. With respect to the increase in the level of taxation, Canada and the
United Kingdom cannot easily bo rated, but they are both substantially ahead of the
United States.
II.

Changes in the tax structure.

The enormous increase in total tax yields—from 15 to 50 billion dollars in
the United States, 5 to 12 billion dollars in tho United Kingdom, and 1 to 2.5 billion
dollars in Canada--was accompanied by equally drastic changes in the composition of
the tax structure of tho three countries. To trace the pattern of this change, taxes
may be divided into four groups; nrnely, taxes on individual not income, taxes on
business net income, excise taxes (i.e., a variety of taxes on business gross income
or cost items), and property taxes.
taxes) 2J

Tho distribution of tho total tax yield (excluding the yield from property
remained rather stable in the United Kingdom whore receipts from the

TJ With an increasing base, tho yield of certain taxes, particularly taxes on net income, increases at a rate faster than the increase in the base, while ether taxes, especially property taxes, increase at a slower rate. On the basis of preliminary estimates, it seems likely that had there been no change in tax rates, taxes as percentage
of national income would have remained about constant for the United States and Canada
and would have shown some slight increase for the United Kingdom.
2/ While receipts from property taxes are included in our over-all figures, they require no special attention in this connection, since they have been a dormant element
Currently, they supply about 9 p°r cent of total tax receipts in
hin wartime taxation.
^11 three countries. British property tax rates are considerably lower than those in
the United States, but the British house owner loses part of what he saves in property
taxes since the rental value of an owner occupied homo is counted as income under the
personal income tax.




CHART

H

TAX RECEIPTS BY SOURCES
CENTRAL AND LOCAL
INDEX

FISCAL YEARS

( P R E - W A R YEAR • 1 0 0 )




BILLIONS OF U S DOLLARS

1940

1941

1942

1943

1944

1939

1940

1941

1942

1943

TxlBLE II
CHANGES IN THE TAX STRUCTURE
(Millions of U• S. Dollars)

'
.

United States

:

1940

i

1944

Central Government
1. Individual Income Taxes
2. Corporate Income Taxes
3. Excise Taxes
4. Property Taxes
Total

5,673

39,334

State and Local Governments
Individual Income Taxes
1.
2. Corporate Income Taxes
3. Excise Taxes
4. Property Taxes
Total

319
155
3,822
4.460
8,756

450
400
4,500
4.450
9,800

2,025
1,436
6,508

20,203
14,483
9,998

14,429

49,134

All Levels of Government
Individual Income Taxes
1.
2. Corporate Income Taxes
3. Excise Taxes
A
Property Taxes
Total

For explanation of items see pp. 11-12.




1,706
1,281
2,686

19,753
14,083
5,498

,4-50.

United Kingdom
(Fiscal Years)
1939
:
1943
2,552
105
2,172

Canada
1939
56
87
290

:

1943
547
743
689

5,030
1,523
4,848
122
11,523

433

1,978

1.015
1,015

863
863

46
41
173
246
507

19
9
215
224
468

2,552
105
2,172

5,030
1,523
,4,848
985
12,386

103
128
463
246
940

566
752
904
224
2,446

4,829

- —

1,015

5,844

— _

-5-

Not for Publication

individual income tax and from excise taxes expanded at about the sane rate, As a
percentage of the total, they both declined r s tho result of the introduction of corporate taxation in the fern of an excess profits tax. In the United States, the share
contributed by the individual income tax rose from cno-fifth to nearly one-half, while
that of excise taxes declined from two-thirds to one-fifth. As in tho United Kingdom,
the share contributed by taxes on corporate income increased with tho imposition of an
excess profits tax. In Canada, the changes in the trx structure were in the same
direction as in the United States, but the share of excises decrer.sod less and thrt of
individual income taxes increased less. These developments ere shown in more detail
on Chart II and Table II.
To some extent the varying emphasis upon different tax sources reflects
differences in the budgetary situation before the war and in economic developments
during the war, but it also reflects conscious differences in wartime tax policies.
The United Kingdom, having entered the war with high income and excise taxes found it
necessary to expand its tax frontiers in all directions with the- result that tho relative shares contributed to the total budget by personal income and excise taxes
underwent little change. In tho United States, receipts from taxes en individual and
business incomes greatly increased relative to excise taxes, reflecting, in part, the
largo increase in individual incomes and corporate profits and thus the largo expansion in the tax base. Also, it reflects a situation in which the over-all level of
taxation was still relatively low so that primary reliance on income taxes constituted
Do spite a much sharper increase in rate s, the relative share of
a sound policy. 1/
income taxes in Canada increased less than in the United States, duo to a smaller ex.
pansion in the base.
III.

Taxes .on individual incomes«

Receipts from taxes on individual incomes increased drastically in all three
countries: tenfold in the United States, fivefold in Canada, and double in tho United
Kingdom. They supplied ever one-half of the total increase in tax receipts in the
United States as against 33 per cent in the United Kingdom and 31 V G T cent in Canada.
The number of income taxpayers in the United States increased from about h million to
over hO million, and in Canada from. 200,000 to over 2 million--thus revolutionizing
tho very character of the income tax.
1. Personal income tax liabilities at various levels of incomes may be
compared in terms of effective rates, that is, tax liabilities expressed as a percentage of net income before exemptions. The effective rates applicable to a married
taxpayer with two dependents are shewn in Chart III. Table III show® dollar liabilities at selected income levels, applicable to a single taxpayer and to a married taxpayer with two dependents. For the United States the net Victory Tax and the New York
State Income Tax are included together with tho Federal Income Tax. 2/
1/ The following analysis of the degree to which various tax sources have been drawn
upon will throw some light on the question whether income taxation in the United
States has now reached a level at which a change in emphasis is called for.
2/ The Canadian Provinces relinquished their privilege of imposing income taxes for
Tho duration of the war. Therefore, while Dominion rocoipts from thp individual income tax increased tenfold, tho over-all increase was fivefold as stated above.




CHAftT

m

PERSONAL INCOME TAXES
UNITED STATES, UNITED KINGDOM, AND CANADA




MARRIED TAXPAYER - TWO DEPENDENTS

TABLE III
INCOME TAX LIABILITIES AT SELECTED INCOKE LEVELS
(In U. S. dollars)

Net
income
before exemptions

Total

:

Refund

Canada5

United Kingdom^

United Statesl

Total

:

Refund

Total

:

Refund

Single, no dependents
$

1,000
2,000
5,000
10,000
20,000
50,000
100,000

&

$

107
3'15
1,172
2,973
8,014
28,797
70,516

189
624
1,975
4,620
11,340
36,550
84,200

f 48
;
106
205
240
240
240
240

$

190
628
2,180
5,229
12,069
36,318
82,531

$

80
160
400
727
727
727
727

Harried, tvvo dependents
1,000
2,000
5,000
10,000
20,000
50,000
100,000

$

13
58
754
2,333
7,042
27,184
68,634

For footnotes 'see p*12




— _
— -

- —
- —

......

—

0

304
1,655
4,300
11,020
36,250
83,900

$114
225
260
260
260
260

$

275
1,747
4,698
11,336
34,985
80,198

0

138
soo
1,091
1,091
1,091
1,091

-6-

ITot for Publication

Tho conpari son shows that British and Canadian rates (inclusive of refunds)
are substantially higher except for the very lowest incone group. Due to the flat
exemption under the Victory Tax, whioh does not allow for differences in dependency
status, large families with incomes of loss than about $1,500 pay a somewhat heavier
tax hero than in the two other countries. 1/ But from thereon, both British and
Canadian rates climb rapidly above United States' rates. A family with an income of
§2,000, for instance, pays $58 in the United Strtes as c gainst $30^ in tho United
Kingdom and £275 in Canada. Moving up tho income scale, tho spread between effective
rates here and in the two other-countries widens rapidly, and reaches a maximum between 010,000 and 020,000, At the $5*000 level a single American taxpayer contributes
§1,172 as against §1,975 in tho United Kingdom and $2480 in Canada. A family with
an income of $20,000, while paying a tax of over $11,000 in the United Kingdom and
Canada, pays but $7, 0i|2 in the United States. Although widest over the middle income
ranges, the spread between the rates here and in the United Kingdom or Canada remains
substantial to well above tho $25,000 income level, Over tho higher income ranges,
United States' rrtes approach, but do not rorch, those payable in tho United Kingdom
and Canada.
The general picture remains tho same if wo comprre tax liabilities net of
refunds. (See, again, Chart III and Table III.) In the United States the refundable
part of the Victory Tax has been discontinued, In the United Kingdom, refunds are
very significant for the lowest income groups, but are small relative to total liabilities for other incomes, the maximum refund being $260. In Canada refunds form a substantial part of total liabilities for incomes up to $20,000 or more, tho maximum, refund being in excess of $1,000. Comparing tax liabilities not of refunds. British
and Canadian rates remain well above those of tho United States. Canadian rates,
while about level with British rates in a comparison of gross liabilities, fall short
of British rates if net liabilities are compared. 2j
2. The comparison of effective rates in the preceding section shows the
British and Canadian liabilities to be very much heavier. It must bo noted, however,
that certain differences in tho tax treatment of various types of incomes are
neglected in a simple rate comparison. Those differences may bo particularly important for tho higher income levels. Tax exempt securities, for instance, furnish a
very significant part of largo investment incomes in the United States; in the United
Kingdom and Canada they are much more limited. Joint returns are mandatory in the
United Kingdom, but not here and in Canada. Rental values of owner occupied homos
are counted as part of taxable income in the United Kingdom but not in the two other
countries. Capital gains aro taxed and losses are allowed in the United States5 in
the United Kingdom and in Canada both are largely disregarded.. The net result of
those differences is difficult to determine, but it is unlikely that the "hidden
burden" is heavier for the United States than for the United Kingdom or Canada.

l/ Tho lowest income groups in the United Kingdom and Canada, however, are subject
to heavier social security taxes than those in the United States.
2/ For a more detailed comparison of income tax rates, see the Federal Reserve
Bulletin for December 19142.




TABLE IV
TAXATION OF PERSONAL INCOME
Federal Income Tax and Corporation Income Tax Combined 1/
(In II. S. dollars)
Married person, no dependents
Total Net Income
including
Dividends Before Tax

Corporation Tax

:
Net Income
for
:
Allocated to Dividends : Personal Income Tax

Personal
Income Tax

Total Tax

$

$

486
2,972
11,226
29,200
70,969
448,609

United States
$

3,000
10,000
25,000
5Q,.0DO
100,000
500,000

$

102
788
2 ,S90
7,820
19,000
122,000

$

2,898
9,212
22,010
42,180
81,000
378,000

384
8,134
8,236
21,380
51,969
326,609

United Kingdom
$

3,000
10,000
25,000
50,000
100,000
500,000

| 3,000
i
10,000
25,000
50,000
100,000
500,000

— -

———

$

964
4,491
14,976
36,374
83,962
473,962

$

964
4,491
14,976
36,3 74
83,962
473 , 962

0

$

898
4,527
13,739
30,361
66,430
374,22 7

$

975
5,118
15,982
36,226
80,680
465,72 7

Canada
3,000
10,000
25,000
50,000
100,000
500,000

$

For footnote see pp, lk-13



5

77
591
2,243
5,865
14,250
91,500

2,923
9,409
22,757
44,135
85,750
408,500

-7-

ITot for Publication

However, one important difforonce tending to understate income tax liabili^
ties in the United States and Canada, relative to British liabilities, may be corrected for. This relates to the treatment of dividend income. In the United Static
corporation net income is-taxed (at a rate of b®%) under tho corporation net income
tax and v/hen distributed in dividonds, it is taxed again under the personal income
tax. In Canada, similarly, a separate tax ifcs imposed on corporations (at a total rate
of 30%) which may not be offset against the trx on individual incomes. 1/ In tho
United Kingdom, the corporation income tax is merely a dovico for collecting personal
income taxes on corporate net incomes rt the' source. Corporate not income is taxed
at a rate equal to the standard rate of the personal inccme tax, but the individual
stockholder is not required to pay the standard rate again on income received in the
form of. dividends.
To obtain a fair comparison between tax liabilities in the throe countries,
liabilities applicable in the United States and Canada hrve been adjusted to allow
for the double taxation of dividend income. The adjustment is shown in Table IV. 2/
The tax liabilities and relative burdens for the United Kingdom remain unchanged, but
those of the United States and Canada are increased. The increase is most significant in Canada, raising its rates above those of the United Kingdom for the great
majority of taxpayers. Before adjusting for the corporate tax, tho rates in Canada
fall very close to the rates in tho United Kingdom for incomes up to almost 025,000,
but drop behind fairly rapidly thereafter. With the adjustments for tho corporation
tax, however, the Canadian rates are the highest up to tho 550,000 income level when
they start to fall behind the rotes for the United Kingdom* For tho United States,
the additional burden of corporate taxation is largest, yet the correction still
leaves the rates in the Unitod States far below those in the two other countries*
3. After comparing the present level of income tax liabilities in the
three countries, it is of further interest to compare the increase in income tax
liabilities s during the war years. An abrupt increc.se in liabilities would impose a
greater hardship on the taxpayer than a gradual increase, so that the country, having
a low tax level prior to tho war, is handicapped in rerching a high level of wartime
taxation.
A comparison between present (unadjusted) income tax liabilities and prewar
liabilities at selected income levels is given in Table V. It shows that the ttt.<&Qfe0a
in tax liabilities in Canada and in the United Kingdom was substantially greater, for
all income levels, than t h e i n c re a so in the U n i t e d S t a t e s , Income taxes in
Canada rose spectacularly from a prewar level generally similar to that in the United
States to a wartime level as high as thrt of tho United Kingdom. (The Canadian prewar liabilities include Dominion and Province of Ontario taxos and the New York State
tax is included in the United States1 liability for both period's*) Income taxes in
tho United Kingdom rose more moderately than Canadian rates, reflecting the rlready

1/ This
rate is composed of an 13$ normal rate and an additional 12% collected
under tho excess profits tax but assessed on tho entire net income.
2/

For explanation of adjustment see note tc Table IV.




TABLE V
INCREASE IN INCOME TAX LIABILITIES
(In U. S. dollars)

United States 1/

Net
income
before exemptions

1940

:

1943

:

United Kingdom Zf

1939

Increase

1

1943

Canada 3/

:

Increase

1939

-

1943

Increase

Single, no dependents
$

1,000
2 ,000
5,000
10,000
20,000
50,000
100,000

$

4
63
232
1,018
3 ,449
16,350
46,540

$

107
345
1,172
2,973
8,014
28,797
70,516

$

• 103
282
890
1,.955
4,-565
12 ,447
23,976

§

27
183
843
2,118
5,842
21,484
52,684

§

189
624
1,975
4,620
11,340
36,550
84,200

0

162
441
1,132
2,502
5,498
15,066
31,516

$ —

$

45
272
983
3,717
16,956
46,245

190
628
2,180
5,229
12,069
36,318
82,531

$

190
583
1,908
4,246
8,352
19,362
36,286

Harried, two dependents
1,000
2 ,000
5,000
10,000
20,000
50,000
100,000

A

___

115
659
2,840
15,298
45,164

For footnotes see p.13.




0

13
58
754
2,333
7,042
27,184
68,634

5

13
58
639
1,674
4,202
11,886
23,470

t
13
579
1,854
5,577
21,219
52,419

304
1,655
4,300
11,020
36,250
83,900

291
1,076
2,446
5,443
15,031
31,481

——

122
688
3,087
16,087
45,061

A

v
>
275
1,747
4,698
11,336
34,985
80,198

-—
275
1,625
4,010
8,249
18,898
35,137

-8~

Not for Publication

high level of income taxation before the war. Nevertheless, British liabilities
increased more sharply than did liabilities in the United States, notwithstanding our
much lower level of prewar taxation. In the United States, a married taxpayer with
two dependents receiving a 02,000 income was without income tax liabilities before
the war and now pays ^58. In Canada, thp same, taxpayer paid no tax before the war
and now pays C>275> or almost five times as much as the American, In the United Kingdom he paid JlJ before the war and now pays
A £10,000 taxpayer in the United
States had his liability increased from 0659 to $2,333, or by less than 31,700. A '
similarly situated taxpayer in the United Kingdom having paid
in the prewar
year now pays <iU,300, that is, an increase of ';2,i4i±6. In Canada finally, the same
taxpayer now pays $U>698 as compared to $688 in the prewar year, that is, an increase
of $+,010.
It is thus evident that not only are present Canadian and British income
taxes substantially higher than present taxes in the United States; but also the
rates have risen much more sharply rbove their prewar level in both these countries,
particularly in Canada.
IV.

Taxes on Business Income

Taxes on corporate income, largely on excess profits, increased no less
drastically than did taxes on individual income. They supplied about J. per cent of
4O
the increase in Canada and in the United States, but only 20 per cent in the United
Kingdom. In the United Kingdom, corporation income is taxed under the excess profits
tax only, while here and in Canada an additional tax is imposed on corporation net
income rt a rate of i|0 and 30 per cent respectively. The gross rate of excess profits
tax is 100 per cent in the United Kingdom and in Canada, as against 90 per cent hero,
but not of postwar refunds, all three rates are close to 80 per cent.
More important than the differences in rates are those in the definition of
excess profits income. In all three countries the incomo exempt from the excess
profits tax may be determined with reference to the income received in the base period, although there are differences in the way the base period is defined. In the
United States the taxpayer has the option of an alternative method, determining the
credit as a certain rate of return on invested capital. All three countries make
provision for the expansion of capital over the base period level and permit reconstruction of the base period incomo in cases %vhere incomes in that period wore abnormally low. The United Kingdom provides for unlimited carry-forward and carry-back of
losses end of unused excess profits credits; in the United States losses and credits
may be spreod over five years while in Canada this period is limited to two years.
Numerous other relief provisions are made in each country.
No detailed comparison of the three taxes can be undertaken here, but given
the necessary data, an over-all picture of their impact might be obtained more simply
by comparing the course of corporation profits before and after taxes in the throe
countries. A comparison of this kind does not consider the effects of the tax alone,
but the joint impact of taxes, price controls, contracting policies, etc. Clearly,
it is this joint impact which is significant. A high excess profits yield by itself
may be an indicator of loose pricing policies rrthpr than of severe tax provisions,
just as a low excess profits yield may indicate stringent price policies rather th^n
liberal tax provisions.




-9~

Not for Publication

Adequate data aro available for a comparison of tho movement of corporation
profits after taxes here and in the United Kingdom. The data present a striking contrast. The index of industrial profits after excess profits tax (but before withholding taxes on dividends), compiled by the /London Economist, has remained practically stable since 1938* The index is based ,on 2,300 companies and is sufficiently
inclusive, in the words of the London Economist, "to display conclusive evidence of
the close control of profits through tho mechanism of excess profits taxation", and
to show "the t there is no sign of the slightest degree of profit inflation." 1/ In
tho United States, profits after tax more than doubled from 1939 to 19>»3. profits
before tax increased by over ?Q0 per cent. 2/ TYith due allowance, for differences in
accounting practices, prewar profit levels and changes in capitalization, it remains
evident that profits after tax were allowed to benefit greatly from war prosperity in
the United States, whereas corporations* obtained no such benefits in the United
Kingdom. Notwithstanding tho huge yield from tho excess profits tax in the United
States, .American corporations are thus enjoying a much more loniont treatment. The
data for Canada are Ivss conclusive. According to a sample of l S * companies, comii
piled by the Bank of Canada, and covering approximrtoly two-thirds of corporrte income, net income after taxation in the fiscal year 1942 rose about ItC per cent above
the prewar level (1938), or at a rate considerably loss than that which prevailed in
the United States.
V.

Excise Taxes,

The increase in excise taxes is indicated by data on receipts shown in
Trble VI. Those include not only sales and oxcise taxes proper, but also employers'
contributions to payroll taxes and war damage insurance. Ls a group, those taxes
contributed l. por cent to the increase in total revenue in tho United Kingdom a n x e t :
\0
gixri
30 per cent in Canada and 10 per cent in the United States. Here and in the United
Kingdom, two-thirds of this contribution was derived from sales and excise taxes
proper, whereas in Canada practically the entire increase resulted from those sources.
Tho yield from sales and excise taxes proper doubled in tho United Kingdom
and Canada and increased by 50 per cent in the United States. In order to measure
tho severity of solos and excise taxos in over-all terms, a comparison should bo
drawn botwoen such taxes paid by tho consumer and total consumers1 expenditures, but
in absence of such information, the ratio between receipts from these taxes and
national income may serve as a substitute. Taking tho most recent year, this ratio
is above 10 por cent for the United Kingdom and Canada end about 5 per cent for tho
United States. Tho indication that tho level of excises is substantially higher in
the other two countries is substantiated by a comparison of tho rates applicable to
various types of commodities.

1/

Economist, London, England, September 19, 19^2, p.365.

2/
Net income of all corporations, excluding dividends received from domestic corporations. Estimates by U. S* Treasury Department, Division of Research and Statistics, September 10, 19U3 •




TABLE VI
EXCISE AND PAYROLL TAXES
All levels of Government
(Millions of U. S. dollars)

United States
1S40

;

1944

1.

Employers' Payroll Taxes

2.

Sales Taxes
817
Alcoholic 3everages
Tobacco
705
Gasoline
1,096
General Sales Tax
559
Others, including Customs 2,017
Total
5,194

1,762
1,125
965
775
2,975
7,602

Total Excise and Payroll
Taxes

9,998

United Kingdom r

!

1939

ia,r Parage .insurance

3.

:

4.

For explanation of items see p * l 3 .




1,314

2,396

254

:

1343

!

Canada

1939

278

;

1943
18

819

6,508

510
409
279

1,186

720
1,918

1,349
218
355
643
3,751

48
35
41
132
207
463

115
97
67
244
362
885

2,172

4,848

463

903

— -

-10-

Hot for Publication

In tho United Kingdom, nearly Qu, per cent of the additional yield from
sales and excise taxes proper was derived from taxes on liquor, tobacco and gasoline,
while these same taxes yielded about 50 per cent of the increase in tho United States
and 37 per cent in Canada. Tho rates en liquor and tobacco are vastly higher in the
United Kingdom than in the other two countries. The tax on a gallon of liquor, for
example, is £23 in the United Kingdom as against $7.30 in Canada and 07*50 in tho
United States. (Both here and in the following examples, tho tax for Canada includes
that of Quebec and the tax for the United States includos that of tho state of Now
York.) The tax on a barrol of beer in tho United Kingdom is $28 as against 07*90 in
Canada and £7.93 in tho United States. The tax on a package of cigarettes ranges
from 27 to 3 | cents in the United Kingdom compared to 9 cents in the United States,
l.
while the Dominion tax in Canada is 18 cents and the provincial tax in Quebec is 10
per cent- of the retail price. Taxes on-a gallon of gasoline are 12 cents in tho
United Kingdom as against 10 cents in Canada and
cents in tho United States. Tho
heavy rates on liquor and tobacco in'Great Britain arc indicative of the high level
of oxcise taxation since these articles absorb nearly l/5 of total consumers* expenditures or as much as rent and clothing combined.
Both the United Kingdom and Canada have a general sales tax on the Federal
level. 7/hile the British purchase tax contributes less than 1 / 1 0 of the total sales
tax yield, the Canadian sales tax contributes over l L . . Tho Canadian tax is imposed
/j.
largely at the manufacturers' level at a rate of 0 por cent; it applies to practically all commoditios excluding, however, most foods. The British purchase tax is
imposed at rates of 16-2/3 per cont, 33-1/3 P G r cent and 100 per cent. Absolute necessities and certain commodities already bearing high taxes, such as tobacco and
liquor, are excluded, while luxuries, such as furs aril baggage, are taxed at the 100
per cent rate. General sales taxes levied by State and local Governments in the
United States are at a very much lower rate throughout, rarely exceeding 3 Tj0T cent.
In addition, all three countries impose special excise taxes (and custom
duties) on numerous other commodities. In the United States and Canada, this group
supplies about l . per cent of tho total sales tax yield, but loss than 20 por cent in
j0
the United Kingdom whoro many cf tho items come under the higher rates of the purchase
tax. A rate comparison again shows the Canadian rates to be higher in most cases,
particularly if allowance is na.de for tho fact that in many cases tho Canadian oxcise
rates apply in addition to the 8 per cent sales tax: rate. On the whole, it is clear
that tho level of sales and excise taxation--as that of income taxation—is substantially higher in the United Kingdom and Canada than in the United States.
*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

In evaluating the conclusions reached in this paper, it should be kept in
mind that taxation is only one part of war finance and that the adequacy of the tax
effort must bo measured against tho need for curtailing inflationary pressures. Few
would hold that inflationary pressures here are loss serious than in tho two other
countries, yet, as we have seen, the tax effort in the United States falls far
behind that of tho United Kingdom and Canada.




-11-

Hot for Publication

Notes to Tables
Table I,
Item 1. Figures for fiscal years 1939-UO through 1 ^ - ~1|3 from the Department of
942
Commerce• Figure* for 1 i s
estimated,
I ton 2.

Soe preceding note.

Item 3» Federal tax receipts from Treasury Bulletin and Revised Budget Estimate of
Aug,, 19U3* State tax receipts from Department of Commerce, State Finances; figure
for 191+3"^ is estimated. Local tax receipts ostinrtod on basis of Department of
Commerce, Financing; Federal, State and Local Governments, 19Ul«
Item
Figures for fiscal years 1939-^0 through lyl\2~h3 frorrl Treasury Bulletin,
Figure for i9U3-Uj- from Revised Budget Estimate cf August 1, 19U3.
Item 5. U. S. Department of Commerce definition. Estimated on basis of data in
British "White Paper on T/ar Finance for 19^3 (C"kL 6h7)8) and The Economist, April 2k,
Twr.
Item 6,

See preceding note.

Item 7, Central Government tax receipts fron annual financial statements of the
Chancellor of the Exchequer and British Budget for
Local taxes (composed
entirely of rates on property) from British "iThite Paper on 'Tar Finance for 19U3*
Item 8, Figures for fiscal years 1938-39 through 19iil-li2 from annual financial
statements of the Chancellor of the Exchequer. Figure for 19'i|2-ii3 from British
Budget for 19^3
Item 9. U, S. Department cf Commerce definition. Estimated 0 1 basis of data in the
1
Financial Post, April 17, 191+3» publications of the Dominion Bureau of Statistics,
Annual Report of the Ban:: of Canada, February 8, 191+3» arid Monthly Review of the
Bank : f Nova Scotia, June. 19/41*
:
Item 10.

See preceding note.

Item 11, Central Government tax receipts from Appendix to the Budget, l^l^-l^.
Provincial and municipal tax receipts from various issues of the Bank of Canada's
Stati sti cal Summary,
Item 12,

Figures from Appendix to the Budget,,

Table II,
Item 1, Includes taxes on personal income, employees1 contributions under social
insurance programs, gift taxes, and estate or succession taxes.




-12-

Hot for Publication

Item 2. Includes taxes on corporato income and on excess profits. Tho capital stock
tax is included for tho United States and the National Defense Contribution for the
United Kingdom.
Item J. Includes sales taxes, oxcise taxes, custom duties, employers1 contributions
to social security programs, and other miscellaneous taxes. For tho United Kingdom,
compulsory contributions for War Risk Insurance premiums and contributions under tho
business scheme, of the Vlar Damage Act are included.
Item 1+. Includes compulsory contributions under tho property scheme of tho Yfar
Damage Act in the United Kingdom.
Table III*
Item 1. Includes Federal incomo tax under the Rovonue Act of 19U2, net Victory tax,
and New York State incomo tax. Maximum earned incomo credit is givon. Victory tax
liability is computed on the basis of a gross income, assumed to be 110 per cent of
the net income shown in tho left column.
Item 2. Liabilities under prevailing rates effective for income earned during- the
fiscal year I9U2-J4.3. Maximum earned income credit is given.
Item 3. Liabilities arc computed on the basis of the Income Yfar Tax Act of 19U2.
Income in excess of 530,000 is assumed to be investment income.
Table IV.
Item 1. In order to make tax liabilities in the United States and Canada comparable
with those in the United Kingdom, liabilities for the United States and Canada must
be increasod to allow for tho taxpayer1s share in the corporation income tax. The
excess profits tax, which is similar In the three countries need not be considered
here. The adjustment involves the following steps:
For tho United States, v/o begin by increasing net income for incomo tax
purposes by the extent to which dividend income would have been greater if there were
no corporation tax. It is assumed that the corporation would hrvo increased dividend
distribution by the amount of tax allocable to dividends. For this purpose, the
amount of dividends (after corporation tax) recoived at various income levels wss
estimated on the basis of Strti sties of Income for 19hl* Each dollar of dividends was
regarded as that percentage {(£)%) of dividends before tho corporation tax which corresponds to the corporate tax rate ( 4 O 0 and was blown up to 100 per cent. Not inI./)
come including dividends before tho corporation tax (column 1) is obtained by adding
the difference between dividends before tax and dividends rfter tax to not income for
income tax purposes (column 3)•
The difference between dividends before tax and dividends after tax thus
derived equals the mount of corporction tax allocated to the individual's dividends
(column 2). This .amount must be added to tho personal income tax (column h) levied
on personal income tax net income (column 3) to derive the total tax liability
(column 5) which can then bo charged rgainst the total income.




-13-

Hot for Publication

2* For Canada, we bo gin with tho srne total not incomes including dividends before corporation income tax as derived for the United States (column !)•
Also, wo assume the seme ratio of dividends before corporation tax to tho total income. Tho individual's share of the corporation tax is then computed at JO per cent
(the Canadian rate) of dividends before corporation tax (column 2). Subtracting this
amount from total net income, wo obtain persorml income tax not income (column J).
The total trx is then obtained by adding the personal income tax on that income
(column i . and the individual1 s share of the corporation tax. (in computing the U
j)
per cent surtax on invested income under the personal income tax, the ratio of earned
to unearned income at various levels was estimated on the basis of Statistics of
Income for 19^-1*)
No specific assumptions have been ma,de so far regarding the extent to which
corporate income is distributed. If it is assumed that the entire income is distributed, nothing need be added. If we assume that part of the corporate income is retained forever, tho corporate income tax in the United States and in Canada, and the
withholding tax in the United Kingdom bo come tho only tax paid. The taxpayer in the
United Kingdom is somewhat worse off in this instance since the rate of his withholding is higher than the corporate rates in the other two countries, If it is assumed
that tho retained income vail be distributed at a later date, the lrrgor percentage
of income received in the fern of dividends would be reflected in a greater upward
adjustment of the personal inc ome tax.
Table V.
Item 1.

Liabilities under Federal and Nov/ York State income taxes.

Item 2.

Liabilities under Finance Act, 1939 end Finance Act, 19^2.

Item 3. Liabilities under Dominion Income ? e r Tax Act as amended through first sesf.
si&n of 1939 &nd Province of Ontario income taxes for 1939. Liabilities for 19U3
for Dominion income taxes undpr tho Income 7Jar Tax Act as emended to Juno 1, 19^3
only, since tho Provinces have surrendered this tax to tho Dominion for the duration
of the war.
Table VI.
Item lo Employers' contributions under social insurance programs. The United States*
program includes old-age insurance and unemployment insurance. Tho United Kingdom
program includes old-age, unemployment, and health insurance. Canada has only an
unemployment insurance plan. Figures for the fiscal yorr 19UU for the United States
and for the fiscal year 19^3 for the United Kingdom and Canada are estimated.
Item 2. Includes compulsory contributions for Vicr Risk Insurance and for property
and business schemes under the "Var Damage Act. Estimated on basis of data in British
Yftiite Paper on Viar Fine nee.
Item 3.

Figures for the fiscal yorr 19UU for tho United States are estimated.

Item I4..

Same as item 3




Table II.