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Form F. R. 1 1
3

BOARD OF GOVERNORS
O F THE

F E D E R A L RESERVE SYSTEM

-Office Correspondence
To

Mr# Despres

Date July
Subject:

From Mr* Krost

19k0

British Tax Structure

as Modified by the Budget of

July 23, 19^0

The British and American Tax Structures in 1939
Before the increases in taxes imposed at the outbreak of war in
1939, total taxes in Great Britain at all levels of government amounted
to about 25 per cent of national income as compared with about 21 per
cent in the United States.

The distribution by type of taxation was, how-

ever, somewhat different in the two countries.

In Great Britain, 37 V e r

cent of public revenues consisted of income and death taxes, while in the
United States only 26 per cent came from these sources.

The largest

single element, and the most important regressive element in the American
tax structure, the property tax, was of much less importance in Great
Britain because grants from the Central Government had gradually come to
supplement and partly to replace taxes on property as a source of revenue
to local governments.

Taxes on residential property were about as high

in Great Britain as in the United States, but there was no taxation of
business property.

Great Britain (like the United States) had heavy

excises or custom duties on tobacco, liquor, sugar, and gasoline; there
were hea*vy British taxes on tea, in contrast to the absence of taxes or
duties on coffee in the United States; but Great Britain had no general
sales taxes.

Payroll taxes were of roughly equal importance in both

countries.
Since the outbreak of war, there have been increases in the
rates of every important tax in the British Government revenue structure




and an excess profits tax has been imposed.

The Chancellor of the Exchequer,

Sir Kingsley Wood, announced on July 23 further increases in the rates of
existing taxes and the imposition of an extremely severe general sales
tax, presented under the name of "purchase taxn.

The tax increases since

the outbreak of War are estimated to yield fl,500 million, about 7
per cent of the maximum national income, valued at pre-war prices. Meanwhile expenditures are proceeding at an annual rate of almost f i . billion,
lj
or 70 per cent of the maximum national income, valued at pre-war prices.
If this rate of expenditure is maintained an inflation of considerable
magnitude seems inevitable; the first evidences of it are already visible.
Income faxes Under the lew Budget
The following table compares income tax liabilities of a
married person with no dependents (with income wholly earned) in the
United States under the rates of the Revenue Act of I I . and in Great
94O
Britain under the rates proposed in the new British Budget. New York
State income taxes have been added to the Federal taxes of the American
taxpayer. For incomes drawn from capital gains and dividends, the comparison would be somewhat different since capital gains are not taxable
at all under British law and dividends are not doubly taxed as they are
in the United States#

On the other hand, the British have no tax-exempt

securities and tax the income of husband and wife as a single income.




-3-

Income

1,000
3,000
5,000
10,000
50,000
100,000
1,000,000

Taxes
(Dollars)
Britain 1/|
u. s.

38
658
1,366
3,546
30,996
73,1+96
882,995

Effective rate
(Per cent)
Britain 1/|
u. s.
mmmm

31
164
828
17,328
50,376
792,584

3.8
21.9
27.3
35.5
62.0
73.5
88.3

mm mm

1.0
3.3
8.3
34.7
50.4
79.3

l/ Conversion rate: h 1 equals

The personal exemption for a single person in Great Britain
is about f j 0 as compared with #800 in the United States; for a married
l.0
person it is |680 as compared with $2,000 here and the exemption for each
dependentvis |200 as compared with II4OO here.

There is an earned income

credit which corresponds roughly to the similar American credit. A single
person with wholly earned income becomes subject to income tax in Great
Britain if he earns as much as fA^SO as compared with the corresponding
level of |890 in the United States.
The British income tax rate structure illustrates the point
that a country that wishes to rely upon the income tax to cover a major
portion of the cost of governmental services must impose heavy rates of
tax upon incomes in excess of #3*000 a year, that is to say, upon those
families which belong to the upper 10 per cent of the income structure.
The British taxes on incomes above 175*000 are now the highest that have
ever been imposed by any country. Income taxes in Germany now reach a
maximum of 65 per cent on all incomes in excess of about 130,000 a year.




The Excess Profits Tax
The present British excess profits tax was imposed in October
1939 to supplement a tax called the National Defense Contribution, which
was merely a 5 Pe** cent tax on business net income.

The excess profits

tax is levied on all enterprises, whether incorporated or not, with
earnings of over fij.,000, except personal service enterprises.

As initially-

imposed, the rate on profits in excess of standard earnings during the
base period was 60 per cent.

The base period may be, at the option of the

taxpayer, the year 1955# or the year 1936, or the average of 1935 and
1937$ or the average of 1936 and 1937•

There is provision for adminis-

trative discretion to deal with cases of exceptionally low earnings in
the base period; in such cases the administrative authorities may increase
base period earnings to 6 per cent on equity capital, as determined by
valuation of the assets of the business

ft

as assets of a going concern"•

There is, however, no "ceiling" provision to substitute a maximum percentage return on capital for base period earnings for concerns whose
profits in the base period were unduly high.

Recent newspaper reports

have stated that the rate of the tax has been raised to 100 per cent.
It is possible that a liberal treatment of depreciation and other deductions from income and administrative generosity to exceptional cases
may considerably reduce the income actually subject to this rate.

¥ith

the information available, it is not yet possible to arrive at a conclusion
as to the real significance of the 100 per cent rate.




Death Taxes
The following table compares tax liabilities for estates of
varying sizes under the British Finance Act of October 1939 and under the
existing United States estate tax as modified by the Revenue Act of 1 l J *
9|0
Increases in the British rates are proposed in the new Budget but insufficient information is available to permit an adequate statement of the
effect of the increases.

The specific exemption under the American estate

tax is tljOjOOO plus an additional |i}.OfOOG for insurance proceeds; the
rate on the part of the estate in the first bracket subject to tax is two
per cent.

The exemption under the British legislation is | | ) and the
1£0

rate on estates in the first bracket subject to tax is one per cent.

Value of estate

50,000
100,000
500,000
1,000,000
5,000,000
50,000,000

Taxes
(Dollars)
Great Britain|
U. S.

3,300
11,000
132,000
336,000
2,520,000
30,000,000

200
ij.,200
8,40
020
211,000
l,901,Ii.00
32,335,000

Effective rate
(Per cent)
Great Britain|
tf. s.

6.6

0.1;

11.0

1+.2

26.1.

33.6
5.4
01-

60.0

16.1
21.1
38.0

64.
I-7

The American taxes exceed the British on estates of over
|25f000f000, but the number of estates of this size is so small that the
rates at this level are of little practical significance from a revenue
point of view.
The Hew Purchase Tax
The new purchase tax is a tax of the seme type as the general




-6-

sales tax. Besides differing in name, it differs in the fact that it is
collected in the first instance from wholesalers (who play a considerably
more important role in the British marketing structure than they do in the
.American) and in that it levies a different rate on commodities classified
as luxuries and on those classified as necessities.

The proposed tax rate

on luxuries is one-third of the wholesale price and the rate on necessities
is one-sixth of the wholesale price.

These rates will vary as percentages

of retail prices from commodity to commodity, but, on commodities subject
to a retail mark-up of 50

cent (or 33 l/3 P e r cent in terms of the

retail price), the tax will amount to about 11 per cent on necessities and
22 per cent for luxuries.

The list of necessities includes books and

newspapers, thus breaking with an English tradition which dates back to
the year I836, when the use of taxes on newspapers as a means of political
repression was successfully attacked by the rising Liberal party. The
rates proposed for the purchase tax are more than twice as high as the
rates which have been used for purposes of the general sales tax in any
country in modern times.
Increases in Commodity Taxes
The taxes on tea, beer, tobacco, and admissions to entertainments have been drastically increased.

The result of these increases

is that beer of the cheapest quality will cost 15/ a pint, cigarettes
will cost 29/ a pack and admissions to moving picture theaters will cost
from 1 i to 10fi more than before the outbreak of War.
f