View original document

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

JU N 1 4 1972
TREASURY department

The Tax Treatment of Earned Income
S-530
November 21, 1947

1

Bill offering « . . . . ..............................
S-531
November 14, 1947

32

Foley address, Young Democratic Clubs, Cleveland
S-532
November 15, 1947

33

.• •

..................................
S-533

39

Bill tenders . « . • ..................................
S-534
November 18, 1947

40

l-l/ 8/£ Certificates, Series A- 194-9
November 19,
1947
S-535

41

Market transactions
November 17, 1947

• • * « • • • • • «

Snyder address, National Industrial Conference Board,
New York
S-536
November 20, 1947
Bill offering . • • ................... ..............
S-537
November 21, 1947
National bank assets
November 24, 1947

.....................
S-538

. . . . . .

44

50

51

Bill tenders
. • • .....................................
S-539
November 25, 1947

54

Snyder statement., Inflation Control, House Banking-Currency
November 25, 1947
S-540

55

The Extension of Old-Age and Survivors Insurance to
Agricultural and Domestic Service TfoEkers, etc« • . • . .
December 1, 1947
S-541

62

Schoeneman announces revision of regulations on employees
subject to Social Security taxes
• • • • * • • • • • • •
S-542
November 27, 1947

88

Bill offering • . • ......................................
S-543
November 28, 1947
Snyder statement, Inflation Control, Joint Committee on
Economic Report • • .................................. ..
S-544
November 28, 1947
The Income Tax Treatment of Pensions and Annuities
December 3, 1947
S-545
Allotment figures on
November 28, 1947

Certificates
S-546

.

...............

89

90

97

. 149

Bill tenders
December 2,

•••
1947

........
S-547

. . . . .

. . . . . .

150

James J. Saxon appointment, assistant to Secretary ••
December 2, 1947
S-548

151

Snyder address, Houston Chamber of Commerce
December 6 , 1947
S-549

. • • • •

152

John W. Gunter appointed Deputy Director, Int. Finance
December 4, 1947
S-550

159

Bill offering
December 5, 1947

••

160

• • • • •

161

S-551

Snyder Cripps letters o n withdrawals of credit
December 6 , 1947
S-552

Debt Limitation ........................ ................ ..
. December 5, 1947
S-553

164

Schoeneman statement on Section 2 of Internal Revenue Code
December 5, 1947
S-554

165

Bill tenders
December 9,

166

• • • . • • • • •
1947
S-555

........... . . . . . . .

Rules on bad debt reserves
December
10, 1947
S-556

167

Customs: Quota commodities
• • • • • • • • • • . . . . .
December 10, 1947
S-557

168

Customs: Wheat
• • . • • • • • • • • • • • * • • • • • •
December
10, 1947
S—558

169

Customs: Philippine commodities
December 10, 1947
S-559

170

• ...........

...

...

Customs: Cotton ................. ....................... ..
December 10, 1947
S-560

171

Census of American-owned assets in foreign countries
December 15, 1947
S-561

173

• . •

Bill offering ............. ............................. ..
December 12, 1947
S-562

175

Finland pays $>260,852.24 on debt
December 11, 1947
8-563

176

Snyder statement, NAC, on gold subsidy
December 12, 1947
S-564
Market, transactions
December 15, 1947

• • • • • • • *

• • • • • • • • • • • • • • • • *
S-565

Snyder statement on devaluation of Russian ruble
December 15, 1947
S-566
Bonds issued-redeemed during November

177

178

• • •

179

• • • • • • • • •

180

• • • • • • • • •

181

Federal Excise Taxes on Transportation
December 19, 1947
S-567

Bill tenders
• • • • • « • • • • • • • • • • • • • • • •
December 16, 1947
S-568

207

l-l/ 8/£ Certificate offering, Series A-1949
December 19, 1947
S-569

208

Bill offering • « • • • • • • • • • •
December 19, 1947
S-570

• • • • • • •

........

Truman confers Medal of Merit on Clifton E. Mack
December 23, 1947
S-571

« • • • •

211

• • • .

212

Six Bur* Engraving-Printing employees receive money for
suggestions
• • • • • • • • • • • • * • • • •
.........
December 22, 1947
S-572

214

LIFO department store i n v e n t o r i e s ..............
December
24, 1947
S-573

215

Bill tenders
• • • • • • • • • • • • * • • • • • • • •
December
23, 1947
S-574

219

Bill o f f e r i n g ..........
December
26, 1947
S-575

220

.................

Classification of Cordova wool
Dece,ber
24, 1947
S-576

Figure to be used in computing credit liability
December
26, 1947
S-577
Snyder denial of story on tax reduction
December
26, 1947
S-578
Bill tenders
* . . .
December
30, 1947

221

• • .

• • • • • • •

224

..........
S-579

• • • * • • • • • • •

225

Individual Income Tax Exemptions
December
22, 1947
S-580

• • • • • • • • • • *

226

Subscription.figures on
December
30, 1947
S-581
oOo

Certificates

..........

289

TREASURY DEPARTMENT

1

Washington

FOR RELEASE MORNING NEWSPAPERS

Friday, Nov ember 21, 1947_____

^ e s s f ® i p Ce

^

-

A staff study entitled "The Tax Treatment of Earns a. Income.1,
dealing with proposals for the réintroduction of an earned income credit
in the federal income tax system, was'made public by the iieasury
Department 'today. The proposals, growing out of a desire for improved
equities and ire re as ed work incentives under the postwar individual
income tax, are examined factually and analytically in the study. No,
policy reepmmendations are made.
Various methods of granting earned income credits are set forth.,
including methods used in foreign tax systems,
Considerations for and
against the equity and work-incentive aspects of earned income credit if
are weighed*. Two administratively feasible methods of granting earned
income credits are described and the Federal. revenue loss under esia is
estimated. The complicating of tax tables and returns is among
administrative difficulties which are discussed.
Several forms of earned income credit have been tried under the
Individual income tax in this country. The last of these was ended by
Congress in 1943. None of these credits, according to the study, cou_d
be said to differentiate in favor of the lower brackets of earned income,
since substantial amounts of unearned income were presumed to be earned.
Also, none of the credits provided important incentives for business
management, since above certain income levels — &1 4 ,0 0 0 during the
years 1934 through 1943 — all income was presumed to be unearned and
the amounts of tax savings from the credits were relatively small.
The two forms of earned income credit with which the study deals
as examples are: la) * tax credit of 2 percent of earned adjusted
gross income: (b) the deduction of 10 percent of earned adjusted gross
income in computing the final tax liability.
The 10 percent credit is more suitable for incentive purposes, ohe
study states*,, because.it provides significantly greater tax reliei for
those with higher incomes than does the 2 percent method.
Actual reductions in taxes paid would not differ _greatly under.
these two methods for the bulk of the wage earners, ms turnat es ^
presented in the study indicate that either method would neduco federal
revenues about | 2 ,000 , 000 , 000 — more precisely, 4-1 ,9 0 0 ,0 0 0 ,0 0 0 under ,
the 2 percent tax credit and 42 ,100 ,0 0 0 ,0 0 0 under the 10 percent
deduction. About 8 8 -percent of the revenue reduction would go oo tax-,
payers with net incomes of less than 4 5 ,0 0 0 under the i percent cr^di ,
and about 78 percent under the 10 percent method»

10

-

2

-

E ith e r method would f r e e approxim ately 4? 500, GOO wage and s a la r y
earn ers from income tax«.
Arguments fo r and a g a in s t an.earned income c r e d it from both the
e q u ity and the work-inc e n tir e viewpoints- •a re analyzed in the study in
d e ta il,, The e q u ity arguments in fav o r o f an earned income c r e d it are
based la r g e ly on th e co n ten tio n s th a t i t provides a convenient and
a d m in is tr a tiv e ly f e a s ib le d ev ice to ta k e account o f ( a ) the absence o f
s d e p re c ia tio n allow ance f o r la b o r , and (b ) th e sm aller a b i l i t y to '
pay ta x out o f earned income ate compared w ith income from c a p it a l*
Arguments a g a in st an earned income c r e d it e ith e r deny th a t the ta x
s tru c tu r e d is c rim in a te s a g a in st earned incom e," or contend th a t the
c r e d it i s a t b e s t o n ly a rough and perhaps outmoded approach toward
achieving, mote e q u ita b le ta x treatm en t fo r earned incomes*
A p p raisal o f the w o rk -in cen tiv e a sp e cts of a c r e d i t i s even more
d i f f i c u l t than o f th e e q u ity a s p e c t s > Q u a n tita tiv e in fo rm atio n i s
la c k in g , and the in c e n tiv e s to work of d if f e r e n t tax p ay ers may be
a ffe c te d d i f f e r e n t l y by the same ta x e s * Even though on balan ce th e
in c e n tiv e s to work may have been reduced by th e c u r r e n t high r a te s of
ta x , the study in d ic a te s th a t th e r e may be a. r e a l q u estio n whether -to ta l
p rodu ctive e f f o r t has been a f f e c te d m a te r ia lly * Over a lo n g er period o f
tim e, however, th e momentum o f the .economic system might be slaved down
by a p e r s is t e n t f e e lin g th a t ta x e s were unreasonably high and u n f a ir ly
d is tr ib u te d *
Although i t is - n o t c le a r t h a t an. .earned income c r e d it -would
n o tic e a b ly in c r e a s e th e t o t a l la b o r e f f o r t , i t m ight have a more
s ig n if ic a n t im pact on the supply o f e x e cu tiv e e f f o r t in the b u sin ess
f i e l d , where the high income ta x e s are s a id to have the g re a te st,
d e te r r e n t e f f e c t s * Even in t h is a re a i t i s not c le a r t h a t an earned
income c r e d it would g r e a tly improve the o v e r a ll supply of . e x e c u tiv e s .
The study p o in ts o u t th a t th e re i s a ls o a q u estio n whether the
earned income c r e d it i s a more e f f e c t iv e rnethoq of stim u la tin g in c e n tiv e s
to g re a te r production than a lt e r n a t iv e methods o f ta x re d u ctio n , such as
ta x r a t e re d u c tio n s , exemption in c r e a s e s , e lim in a tio n of double ta x a tio n
o f d iv id en d s, and th e s p l i t t i n g o f fa m ily incomes*
H eintrodu ction o f an earned income c r e d it would add co m p licatio n s
to the e x is tin g In d iv id u a l income ta x procedu res, both f o r taxp ayers
and fo r th e. Bureau o f I n te r n a l Revenue* The d i f f i c u l t i e s would be
lessen ed i f th e f i r s t | 5 ,000 o f income from any so u rce 'w e re -to be
tr e a te d as earned, s in c e th e c r e d it could then be in te g r a te d in to the
p resen t s im p lifie d ta x ta b le » However, th is presumption would weaken
the e q u ity b a s is o f the c r e d it and add s u b s ta n tia lly to the revenue
lo s s *
oOo

10

2

‘ t h e W L TREÂ.TÎ4EHT OE EAH1ISD IHCOKE

Division of Tax Research.* Treasury7, Departnent»
Hove tabor 19^7

Tbe Tax Treatment of Earned Income

One of the possible modifications of the Federal individual
income tax structure in connection with general tax revision is an
earned income credit.
Interest in improving the equities and
increasing the work incentives under the postwar individual income
tax has redirected attention to' the earned ‘income credit as a method
of implementing these policy objectives. This study examines various
methods of granting earned income credits under both Federal and
foreign tax systems. It discusses the considerations for and against
the equity and' work-incentive aspects of'earned income Credits. *: •
It presents estimates of revenue .loss under two administratively
feasible methods o f 'granting earned income credits and discusses the nature of taxpayer compliance and administrative problems'
likely to be encountered. The study contains no policy recommendations
and is confined to providing factual and analytic background material
to assist in the formulation of such recommendations.
This >study v/as prepared in 'the Individual Income Tax Section
of tlje Division of Tax Research. The revenue estimates were ’. •
supplied by the Office of the Technical Staff.. In.its preparation,
valuable .assistance and suggestions were., received from other members
of the Treasury tax staff, including the..Office of Tax Legislative
Counsel.pn.legal natters and the Bureau of Internal Revenue on
administrative matters.
This subject has.also been considered by a committee composed
of the technical tax staffs of the ,Treasury. Department and. t h e ;
Joint Committee on internal. Revenue Taxation. A.n early draft* of
this study was made available to the committee and it'has benefited
at various points by the committeefs discussions. However, none of
the materials contained herein should be considered as representing
the views oft the staff of the Joint Committee, on Internal Revenue
Taxation.

. Division of Tax Re'sear ch
U. S, Treasury Department

"The Tax Treatment of Earned Income
Table of Contents
Page H o ,
Summary
Introduction,
II* American systems of differentiation,
III. Foreign, systems of differentiation......... ..... i...••• •

4

IV. Bases for an earned income credit.,,.••
... •••• •? »•• •* ...„5
A#. Equity arguments favoring an "earned’income'credit.... ■ 5
B #. Incentive arguments favoring an earned income credit. S
V.

Cost and impact of an earned income .credit. ..........i...•
A. Distribution of tax burden under illustrative

earned income credits.................»
3.
C.

9

«»*••»*•••* +0

Cost of illustrative-earned income credits;..;.;....... 11
Modifications-', of;illustrative earned income credits.. ..12
1. Presumption that all income below a certain .
amount is earned.................
........... 12
2. Aii upper limit to earned income credit.••••••••• -14
3 • Business income................. .
•• *• *.*,*>
^

VI. Appraisal of the earned income credit......... i............ * lo
. A. Equity aspects of the earned income credit.,••»...••• lo
B # Incentive aspects of earned income credit.-....... .
17
1 ». High taxes and total effort
.••n • ^7
2, The supply of executives........................ 20
'3 * ,Tiorlc incentives and investment incentives....... 21
C. Thè earned income-credit and alternative methods• .
of reducing t
a
x
e
s
V
....... •••*•••• .22
VII. administrative aspects of earned income credit...... .
A^ Defan.ition of earned income
: B . ’ Revision of tax tables and tax f
o
r
n
s
1 . Tax tables ..
2• Tax forns
.... 26

24
24
• 26
2b

4
Table of Coat exits
- 2 Pag e Ko,
•, _••, É
tables 1
Table ITo.

1

O
C

3

k

5

6.

(

O

I. Ê||p f$
,/V ■
; ;..

■|
^

Title
1-Iaxirmn. tax saving resulting from the earned
income credit and difference' in tax on
unearned and earned incone computed at the
level where maximum earned Income credit
applies, 192 ^ 13 ^3 . ....... ........ . *... *

** •

29

Difference in tax on unearned and earned income
under present- law in the United Kingdom, Canada
and Australia., computed at the level where :
maximum earned income credit applies

30

■ Comparison of tax value of earned income créait
in the United Kingdom for 19^7— 4-3, Canada, for
I9 U 0 , and Australia for 191+6- % , for selected
amounts of net income.......... .......... .

31

Comparison of successive increments of adjusted
gross income before tax and after tax under
present law, and under two illustrations of an
earned income credit, for specified amounts of
adjusted gross income..... *..... *....... »..... »*

32

Comparison of tax liability under present law
with tax under two illustrations of an earned
income credit, for specified amounts of
adjusted gross income. .......... ..........

3^

Comparison of two illustrations of an earned
income credit with present law, for specified
amounts of adjusted gross income................ »

36

Estimated number of taxable income recipients
under present law, their adjusted gross income
and total tax liability, and the number of
taxable income recipients with earned adjusted
gross income and their earned adjusted gross
income, distributed by net income classes,
assuming income payments of $l6b billion

3S

Table of Contents

- 3Title
Estimated number of taxable income recipients
with reduced taxes or made nontaxable and the
amount of tax decrease from present lav/, dis­
tributed by net income classes, under two
methods of allowing earned income credits,
assuming income payments of $166 billion.... •<*
Estimated number of taxable income recipients
with reduced taxes or made nontaxable and the
amount of tax decrease, from present lav/, dis­
tributed by net income classes, under two
methods of allowing earned income credits
'modified by the presumption that the first
$ 5 ,0 0 0 of any income is earned income,
assuming income payments of $x 66 billion«*•••••

The Tax Treatment of Darned Income
• r •j

* ’

s u i m m ''

1* Although the United States has not had any preferential
tax treatment for earned income since I 9 H3 »'there recently have
been proposals for the réintroduction of a n 'earned income credit*
Some proponents are interested in the credit as a,method of stimu­
lating work incentives* ‘Others stress the equity aspects of relief
for earned income.
2, The United States had a credit for earned income during
the years I92 H-I 93 I and 193*f4-9^3* In I92 U the credit was 25
percent of the normal tax on earned net income and during 1 9 2 5-1931
it was 25 percent of the normal tax and surtax on earned nët income.
During 193^— 19^3 the credit took a different form, a deduction from
net income of 10 percent of earned net income or net income, which,
ever was lower, and applied only to the normal tax; (h- to 6 percent
during this period). During these periods, the earned income' credit
could not he defended as a-method'of differentiating in favor of
the lower brackets of earned income because substantial amounts of
unearned income we re presumed to be earned. Prior to 193^> ’$5*000»
and thereafter $3,000, of income was presumed to be earned whether
earned or not. Also, the credit cOuid not be considered ah.important
incentive for business management since above certain income levels
($14,000 during 193 .b— 19 ^3 ) all income was presumed to be unearned
and the amounts Of tax saving from the credit were Relatively
small*
• 3* Special treatment of earned income is provided in the
income tapies of Great Britain, Canada, and Australia,
In Great Britain
the credit is one— sixth of earned income (but not more than $1,000)
deductible from income subject to-the standard rates* There is no general presumption that all unearned income below a certain amount
is earned. Thé tax value of the credit reaches a maximum of $^50
at $6,000 of earned income or about 20 percent of the tax on unearned
income. However, it is not allowed for surtax, and it•is viewed
‘ primarily as a wage earner*s credit.
The Canadian credit takes thé less usual form of a special tax :
of H percent on unearned income in excess of $1,600, Below this
amount all income is, in effect,:treated as earned. This credit
provides a comparatively mild amount of differentiation between
earned and unearned incomes below $5*000, but above this level it
tends to increase in importance, since there is no upper limit to
the recognition of earned income. Thus, at $30,000 of net income,
the amount of differentiation in favor of earned income is $1,126 or
9 percent of the tax on unearned income.

The Australian credit has a lower limit of $ 6 HS> below which all
income is treacted as earned and an upper limit of $1 6 ,2 0 0 above which
all iincome is treated as unearned, Within these limits, the-lower of two
rate schedules is applied to earned income* The maximum credit is
$31U a t •$16,200 of earned income or about 9 percent of the tax on
unearned income« While the Australian credit may be viewed as more
of -an incentive credit for wage earners than-the Canadian, credit, it
also provides more incentive to upper income earners than thé British
credit,
h. Proponents of an earned income credit present both equity
and work incentive arguments to substantiate their requests for
income tax differentiation in favor of earned income«
■Prom an equity standpoint,the earned income credit may be viewed
as. a method of placing earned income on the same net income basis as
unearned income in arriving at a homogeneous total of income that
can be used as a fair measure of taxable capacity. Thus, it is con­
tended' that the recipient of earned income, unlike thé recipient of
income from capital, is not allowed a deduction for depreciation in
spite-of the fact that his productive capacities depreciate as he gets
older.and.aré ultimately.exhausted. Also, it is claimed that the
earned income recipient should be allowed a differential tax advantage
in saving a fund for his old age, since he has less taxable capacity
than the unearned income, recipient who already has a capital fund on
v/hich he may draw, Purther, the wage and salary earner1s costs,
monetary and psychic, of earning a living are said to be higher than
the costs of t h e .recipient of unearned income. Moreover, the person
who earns a high salary during a, short working life is not allowed
the' averaging of income extended to recipients of capital gains or
business income., Finally, the trust arrangements, family partner ships,
and other devices of tax reduction available to recipients of unearned
income are said to be closed to recipients of earned income residing
in common— law States. To take account of these extra expenses and
burdens of earning an.income, it is thought that the earned income
credit provides a convenient and administratively feasible device.
Prom the incentive standpoint, an earned income credit is
urged on the grounds that the work incentives of business managers
need to be stimulated in the interest of assuring the continuance
of a highly productive economy. The present type of tax system is
thought tp leave too small a step-up in compensation after taxes to
assure the undertaking of the responsibility and effort needed to
maintain and improve the level of business efficiency,

6
"

'
"iiì -

;
5 <» Two illustrative earned-income'Credits which would be .admin­
istratively feasible may be considered-as useful methods of implementing
the equity and incentive.aspects of an- earned income credit. These are:
(a) a tax credit of 2 percent of earned adjusted gross income allowed
against a. tentative tax;computed: without such credit, and (b) the allow­
ance of 10 percent of earned adjusted gross income as a deduction from
income in computing the final tax liability.
For generai equity purposes, the two approaches to the earned
income'credit do-not differ greatly, since for both the bulk of the
wage earners and the bulk of earned income the reductions in tax are
not greatly different, However, .the dO-percent credit is more suitable
for incentive purposes because it provides significantly greater tax
relief for those with higher incomes than does the 2 -percent method.
The estimated cost of the two earned Income credits does not differ
greatly,. Assuming income payments of $166 billion, the 2-percent tax
credit wou,ld cost about $1,9 billion or 11 percent' of. the- estimated
-total tax liability; the 10-percent.deduction would cost about $2,1
billion or 12 percent of the total tax liability,

tj

• .Under both methods ipost of the 'revenue cost would be allocated
to taxpayers with net incomes of less than $ 5 ,0 0 0 ; about SS percent'
under the 2—percent credit and about J-B percent 'under the 10 -percent
deduction«, However, the somewhat larger revenue loss under the
10 -percent method is.attributable to the larger tax savings which
would be given to those with incomes above $5,000, Thus, while the
revenue loss to the under $ 5 ,0 0 0 group is roughly the same under
either method ($1 ,6 8 6 million under the’2 -percent credit and $1 ,6 2 2
million under the 10 —percent deduction), the revenue loss allocated to
those with incomes above $ 5 ,0 0 0 would be about twice as large under
the 10 -percent method ($Hyo million) as qnder the 2-percent method
($237 mill.ion). Under the 2-perceht credit about' k f5 million wage
and-salary earners would be made entirely nontaxable, and under the
10 -percènt deduction about U ,3 million would be made nontaxable.

The definition of income payments used -here is "the unrevised
: concept. See "National Income Supplement- to Survey of Current
Business," July 19^-7« The current level of income payments is
higher than the $166 billion level assumed when these estimates
were prepared. The higher level of income payments would raise
the amounts of the revenue losses involved, but thè percentages
of the revenue losses to the total- tax liability would not.be
changed appreciably.

6 , In. the past* the federal earned income credits have "been
implemented with presumptions that (a) a minimum amount of income was
earned even though the income vias actually unearned* \b; all indome
above a. specified amount was unearned even though the excess was
actually earned, end (c) not more than 20 percent of trade or business
income was earned*
lf# in the event of adoption of an earned income credit, a
minimum amount of income from any source wore again presumed to 'be
earned,- the equity basis for the credit would be materially weakened,
since there would be no tax differentiation in favor of earned as
compared with unearned income below the presumption, and^the revenue
cost would bo substantially increased* Thus, a presumption that the
first $ 5*000 of income is earned would increase the revenue cost by
somewhat more than $350 million, raising the cost of the 2-percent
credit from $1*9 billion to $ 2*3 billion and of the 10 -percent deduc­
tion from $2*1 billion to $2*5 billion* Under both methods, a slightly
larger proportion of the total revenue loss would be allocated to tax­
payers with net incomes of loss than $ 5 »0 0 0 , and the number of taxpayers
made nontaxable would increase to somewhat more than 4*5 million*
Considerations in favor-of such $5*000 presumption are the administrative
and compliance simplicity which would result from incorpora.ting t e
earned-income credit into the simplified (Supplement T/ tax
tho
fact that most of the income (SU percent) of taxpayers with loss than
$ 5,000 of income is earned; and the resulting improvement in the formula
that not more than 20 percent of trade or business income is earned*
The imposition of a top limit on earned income, above which the
credit v/ould not apply in order to implement the view that a relatively
lower ability to pay income tax out of earned income applies only to
,!mode rate 0 amounts of such income, v/ould conflict with tho incentive
aspects of the credit* Thus, an earned income limit of $15,000 v/ould
mean that after realization of the benefit up to this amount no more
incentive than now exists would be provided to executives considering
increasing their efforts and responsibilities to earn more than this
amount. Under this top limit, tho revenue loss from the 2-pcrccnt
credit would bo decreased by only $22 million, reducing the total
revenue loss to $1,903 million. The decrease in loss^would be propor­
tionately larger under the 10 —percent deduction, but it would nou be
of crucial size from the policy viewpoint.
A certain proportion of trade or business income must bo presumed
to be earned because of the administrative impracticability of deter­
mining the ■portion actually ea.rned. The portion of business not
income attributable to the efforts of proprietors and partners probably

— v .-

.

-

varies with the size and. nature of the business* Thus* a presumption
that 20 percent of the business income is earned tends to understate
the portion of profits attributable to wages of management in small,
labor-using businesses«, On-the other hand, a 100 -percent presumption
tends to give an undue advantage to owners of large, capital-using
businesses. In the past, the presumption that the first $3*000 to
$ 5 ,0 0 0 of business income was earned tended to give a practical
solution to the. equity aspects of this problem* When this minimum
income presumption is coupled with the 20-percent business income
presumption, it treats a decreasing proportion of business income
as earned (ranging from 100 percent to 20 percent) as size of trade
or business net income increases. Since the trade' or business income
of taxable income recipients is estimated to be $19 billion, the
difference in revenue cost between a low— and high-percentage
presumption would be relatively important«, Under the 2—percent
credit, assuming no minimum or maximum earned income presumption* a
20—percent business income presumption would account for a revenue
loss of less than $75 million and a 100 -percent presumption would
cost more than $300 million,
7* .Appraisal of the equity arguments for an earned income
credit must necessarily rely on opinion and judgment, since factual
answers to the complex issues are not available. The arguments
against an earned income credit either deny that the tax structure
discriminates against earned income, or contend-that the credit is
at best only a rough, and perhaps outmoded, approa.ch toward achieving
more equitable tax treatment for earned incomes. Thus, if earned
incomes have special costs and expenses which ought to be allowed as
deductions,- then, it is more equitable to allow them directly, since
a credit would not differentiate between equal amounts of earned
income with varying amounts of expense and depreciation. The
depreciation argument is motivated by the desire to help earners
save an old— age fund, but continuation and-perfection of the soGial
insurance system may be preferable to an earned income credit. As to
equalizing the capital gain and loss carry-over advantages accorded
unearned income, it would be more equitable to introduce adequate
averaging'for all Incomes, both earned and unearned. Averaging
would also, solve the issue of variability of incomes. An earned
income credit would not solve these vexatious problems, ileither can
the credit be viewed as an effective offset to the tax-reducing
opportunities available to unearned incomes in all States and
earned incomes in community-property States, here, too, there are
more direct approaches, such as compulsory joint returns or allowing
all incomes to be split equally between spouses, Finally, when all
of the Federal, State and local taxes are considered, it is extremely
difficult to say that • earned1- incomes are treated less favorably than
pqa:earned.^inpq.peq.^, On balance, one cannot measure the extent of
the discrimination, if any exists.

g. Appraisal of the work-incentive aspects of a credit is even
,in^e:.difficult than in the case of. the equity aspects owing to the
,-^c|e nof objectiv'e,.. quantitative information and. "because the incentives
tfOr:wnrk.. ;o£ different taxpayers may "be affected differently by the ;
rsjp,e taxes.
.
„
,•
,
*\
\h
Thepe is .nO question but that some' income 'taxpayers .Respond -toeither a. high level., of tax or high rate'of graduation by'a reduction
in-.effort,, and there, is also substantial weight behind the generai
presumption ..that the.’individuai income tax tends, to decrea.se- the,.; .
incentive.of individuals to eafh additional income. Consequently, .
it may b.e'reasoned that an earned income credit of the 10 —percentdeduction -type should tend to increase the incentive to work, since
it reduces the. level of tax and rate of graduation applicable to
earned income,
Against, these-considerations, however, .there must be weighed
other considerations which may more or less offset them. Thus, in
the same way that wartime needs brought forth wartime effort, the v
postwar transitional need's can be expected to .induce some taxpayers
to accept the continuation of high taxes without materially reducing
their incentives to work« .Another offsetting consideration is based
©n. the-.high demand for income by-individuals who desire to maintain
relatively fixèd or even increasing levels of consumption and saving*
The„incentives of these individuals tend to be increased rather than
decreased, by high taxes* A tax reduction would tend to reduce their
incentives to work and slacken their efforts, since their objectives
could be met with smaller incomes before tax* Moreover, even those
whose incentives to work are decreased by taxes are limited, in. the;
extent .to which they actually can reduce their efforts, since their
positions and businesses must be protected from inroads likely to be
made by their most aggressive competitors who are least affected-by
the high marginal tax rates* Finally, clients, customers and- incomeproducing. .opiDortuniti.es that are not taken by taxpayers-whose, incentives
to work; have been decreased by high taxes may be taken by their cotipetitors whose incentives have not been decreased as much or may' even
have been increased^ and by those whose evaluation of the future income
from current undertakings, tends to offset.the decentive effects of
currently high taxes.
In view.of the foregoing considerations and in the absence of
objective, quantitative information, there may be a real« question
whether the current high.rates of tax have in the short-run actually
reduced the to.t.al effort materially even though on balance the .'
incentives to work may have been reduced* Over a longer period of
time, the momentum of the economic system may be slowed .down b y a
persistent feeling-that taxes are unreasonably high and unfairly .
distributed. This feeling, however, is not exclusively:Within the
purview of high— income taxpayers. .
,
-

— vii —
9. Although it is not clear that an earned incone credit would
noticeably increase the total labor.'.'effort, it night have a nore
significant inpact on the supply of executive effort in the business
field where the high •incone taxes are said to have the greatest
decentive effect. A substantial earned incone credit which signifi­
cantly differentiates against unearned-incone, would tend to draw a
greater supply of. executive effort into the tax-favored area away
iron the discriminated area, and would provide, added indueenent to
existing executives to maintain and increase their efforts. However,
there are also gone offsetting considerations to these tendencies,
in addition to those discussed above in connection with the effect
of a credit on total effort. There are other important determinants
of occupation besides remuneration among individuals with business
executive capacities.
Individuals in competing occupations may not ■■
be induced to shift their efforts into.the business field by the
earned income credit, since some would automatically obtain the credit
and others night be successful in changing their form of remuneration
so as to include more of it in the earned income category, A de­
creasing proportion of taxpayers 1 incomes is earned as the size of
their incomes increases and, consequently, for many executives the
benefits of the earned income credit may be weakened by the decentive
effects of the tax differentiation against unearned income. Finally,
even though the compensation after taxes is no longer as attractive
to executives as formerly under low taxes, the alternative opportunities
of employment nay be still less attractive. Thus, even though the
net effect of a substantial earned income credit may be to increase
the supply of effort on the part of existing executives, It does not
necessarily follow that there will be a great improvement in the over­
all; supply of executives.
10. Insofar as an earned income credit differentiates against
unearned income,, there must also be considered the likelihood that •
incentives to invest are equally sensitive (or perhaps even more
■'sensitive) to high taxes as incentives to work. There appear to be
no.good grounds for regarding investment as performing a less useful
part than personal service in the productive process. Moreover, it is
extremely difficult to classify economic activities from the incentive
standpoint into those, that merit tax concessions and those that do not.
The active investor who directs his own -capital now into one and then
into another venture nay be contributing as valuable personal services
.as the hired manager, and yet most of his income would not ordinarily
be counted as earned. This inability to distinguish adequately between the
earned and unearned portions of income jointly produced by effort and
capital tends to limit the usefulness of the earned income credit for
work-inc ent ive'purpo s e s.

11. There is also a question whether the earned incone credit
is a more effective method of stimulating incentives to greater
production than alternative methods of reducing taxes,
General individual income
tax rate reduction appears to he a
more flexible way of approaching the tax problems of incentives to; .:
work and invest; The earned, income credit has a disadvantage, compared
with rate reduction' in that it .must necessarily give a greater portion
of the tax decrease to low— income taxpayers whb nay neèd relatively
little tax reduction, to stimulate their incentives to work compared
with the higher income‘taxpayers;
.An- increase ih personal exemptions would give’the greatest
relative amount'of -tax'relief to the-lower income'groups without ,
distinguishing between earned and unearned incomes'. Indirectly, by
increasing the demand of"the mass of income taxpayers.for goods and
services, it would normally tend to stimulate work and investment.;incentives; -. ’ '
*
*’
The proposal to split family incomes could he expected to provide'
some -stimulation of incentives to work and invest becausè all. of the •
tax decrease- would go;to taxpayers whose incomes fall^ a bove.the
first bracket, thé chief beneficiaries being middle— and’upper— income.’
married couples residing in.comnOn~law States«who receive all or most
of their incomes from earnings..
- ‘
Although the reduction or elimination, of the double taxation .
of dividends-■runs counter to the equity implications of an earned
income; credit, it would not necessarily conflict with-the., incentive
aspects since higher income taxpayers tend to receive both earned
and unearned incomes, As substitutes for rate' reductions, however,
both the earned income* credit and the dividend credit have.the
disadvantage' of giving thé fate structure a nominally high appearance
which may have an undesirable psychological effect on incentives;-. .- ;
12.
' The. réintroduction of. an earned income credit would addcomplications to the existing .individual income tax procedures from *.
both the viewpoints of taxpayer compliance and of administration by
the Bureau of Internal Revenue. Basing the credit on earned adjusted
gross income.rather "than earned net income would be the most adminis- .
tratively practical method .under.; present procedures. Substantial
additional simplification could be obtained if the'first $2 ,0 0 0 of
income'from any source were to be treated as earned, since the
credit could- then be integrated into the simplified (‘Supplement T) :A.
tax table* However, this minimum income presumption .would'weaken
the equity basis' of the 'credit and would add substantially to the
revenue cost*

9
- ix —

J ot administrative purposes, Porm lOHO and the instructions
would need to be revised and. expanded, to permit the segregation of
the earned portions of incomes appearing in- -vatriojis .income schedules,
the aggregation of such earned incomes, and the computation of the
credit,, These changes would tend to complicate the forms-and instructions*
In the absence of^the,,$5 ,0 0 0 minimum income presumption^ the
simplified 3?orm W— 2, ■used by. over 20.■■mill-ioh taxpayers-, could be kept virtually as simple as it is now,.' if the Small category, of unwithheld '
income, some -times reported on these returns, consisting of up to $100
of wages, interest, and;dividends were presumed to be earned*. Sincethe maximum tax,benefit a.taxpayer could-receive from this"presumptionwould be only about $2 -, the, administrative advantages would seèm to
outweigh the-equity and revenue arguments which might, be raised in •
opposition.
f .
<-'

The Tax Treatnent of Earned Incone
I.

Introduction

Since the enactment of the Revenue Act of 19*43 there has "been
no special individual incone tax treatnent for earned incone.
Recently there have been several proposals for the réintroduction
of an earned incone credit. Some proponents are-interested in the
credit as. a method of stimulating the. work incentives of business
executives* 1/ Some stress the. equity, aspects of relief for earned
incone, although the incentive effects are also listed in its
favor, 2./ Others conclude that its usefulness is U n i t e d to the
lower incone brackets, and propose rate reductions at the higher
incone levels for. work and investnent incentive purposes,
, Labor has not been sponsoring an earned- incone credit in
recent years, Apparently, its primary interest is .to increase .
personal exemptions and to Make then more effective by a, system
o f .carry-overs of .unused exemptions, *+/ ,

1 j Gen* Browning’, Albert J . reported in the Wall Street Journal,
2J

3j
H/

March 5» 19*46'and March 20, 19*46«, Investnent Bankers Association,
reported in the Hew York Tines, May 22, 19*47» P* *41»
Chamber of Connerce of the United States, Federal Expenditure and
Tax Policies, December 19*46, pp,. 2*4— 26, Parker, Lovell H, Hearings
on H.R, 1, Committee on Finance, 80th Cong,, 1st Secs,, pm, 351~
352.
Lutz, Harley L, The Tax Review, June 19*4-6, p 0 2 5 .
Repeal of the earned incone credit was opposed in 19*43 by
Mr, Philip Hurray, President of the Congress of Industrial
Organizations (Hearings on Revenue Revision of 19*43® Hays and Means
Committee, Joth Cong,, 1st Sess„, pp, 921-922}* and by the Executive
Council of the American Federation of Labor (Report of the Executive
Council of the American Federation of Labor to the Sixty— fourth
Annual Convention, Hovenber 20, 19*4*4, p. 68 ), The 19*4p tax proposals
of the C.I.G, and the Rational Lawyers Guild did not include proposals
for agi earned incone credit (Hearings on Revenue Act of 19*45» Senate
Finance Committee, 79th Cong., 1st Sess,, pp, 105 — 106, 12*4— 125), and
the Report.of the Executive Council of the American Federation of
Lab or (S ixty-f if th Convention, October 7» 19*4-6, p* IS9 ) ¿id not in­
clude a recommendation for the réintroduction of. an earned incone
credit. Similarly, the recent tax statements of the representatives
of the C.1,0* and the American Federation of Labor before the Committee
on Finance did not include reference to an earned incone credit, Hear­
ings on H.R* 1, op. cit0 » pp. 25 I- 2 5 3 , 580-5S2.

Historlcally, there .-has never been an earned income credit in
this country or in the United Kingdom, Canada and.-Australia designed
to give business executives special relief -from the full impact of
the income taxes« But each of these.countries has. provided a credit
to differentiate in favor of incomes earned from direct,•personal
effort as distinguished from incomes received by way of return on
capital* The methods used for granting the credits have, for the
most part, resulted in directing the tax relief to the lower income
taxpayers«
IX*

American systems of differentiation.

The present income tax lav; in the United States dates from 1913»
but not until. 192 ^ was provision made for an earned income credit«
This tax credit, which at first was 25 percent of the normal tax on
earned net income, was extended, for the period 1925—1931 to apply to
both the normal tax and surtax«
The normal tax for 192 h was mildly graduated and, consequently,
the tax value of the earned income credit increased at a somewhat
faster rate than Income* The tax value of the credit for., the y e a r s 1925-31 increased at a greater rate because it applied to the combined
normal tax and surtax« However, the effect of graduated rates was not very substantial because each act provided an upper limit to the
amount of income ¡which could be fconsidered as earned in computing the
credit* In 192 U, this limit was $10,000; during 1925-27, $20,000;
and during 19 2 S-I93 I 9 it was $ 30 ,0 0 0 « Over the range of earned
income allowed in computing the credit, the combined normal tax and
surtax rates- wore gradua ted from 2 t,o 6 percent in I92 U; 1 - 1 /2 to
9 percent during 1925-1927; and 1 - 1 /2 to 13 percent during 192S-1931‘
> l/
The maximum earned income credit for a married person, without depend­
ents,. was $55 in 192 U; $ 20 o during 1925 - 2 7 ; and $^96 during I 92 S- 3 I* 2j
Tho differential tax aspects of the credit were even less than indicated
by these amounts, however, because certain amounts of unearned income
were presumed to be earned* 3 /

TJ The" range was 1/2 to 12 percent under the reduced rates provided
for 1929 by Joint Resolution of Congress*

2[ The maximum earned income credit for single persons without
dependents was $75 in. 192 h; $231 in 1925 - 1 9 2 7 ; end $521 in
192S-1931o
3,/' See Table 1 which shows the ’’difference in tax” to be a, smaller
amount than the ”maximum earned income credit«” The difference
in tax is smaller than the maximum credit by an amount equal to
the tax value of the earned income presumption«

The earned income credit was eliminated for the years 1932 and
1933 a s part of the effort to sustain the Federal revenues during the
depression* In 193^* a credit was restored in the form of an allowance
against net income an compared with the previous credit against tax*
The new credit was either 10 percent of the amount of earned net income
not in excess of $lU,000 or 10 percent of the entire net income* which­
ever was lower* 1/ Since it was allowed only for normal tax, which
during the years 193^~’^'3 was either 4 or 6 percent» the maximum amount
of earned income credit never exceeded $$U« The credit was finally
repealed by the Revenue Act of I 9H3 , effective in 1 9 ^ «
In the past,, the earned income crodit could not lay claim to
importance as an incentive for ."business management, for the upper
incomes wore excluded, and the amounts involved wore relatively
small© For a married person, the maximum credit never exceeded $'496
prior to 193^ and never more t h a n $ 8 U otter 193^* Moreover, during'
the Twenties, the tax liabilities were so low that although the
credit approximated 25 percent of the tejf liability on unearned ■
income at the $ 30,000. income, level, the: tax difference in favor of
earned income added only about 1 to 2 percent to tho net earned
income after tax* 2/
The earned income credit, during these periods, could not bo
defended e.s <a method of differentiating in favor of the lower
brackets of earned income, because substantial amounts of unearned
income were presumed to be earned« Prior to 193^ j this amount
was $ 5,000, and thereafter $ 3,00Q© Consequently,! the source of
income "made no difference except in the- income areas between the
presumption .of $ 5?000 and the upper limit of $10,000 in I 92H; between
$ 5,000 and $ 20,000 during 1925- 27; between $ 5,000 end $ 30,000 during
192S-193T; and between $ 3,000 and $lU ,000 during 193^ 19^ 3® in the
lower aneas of the income sce,lc, the canned income credits, through­
out .their history, failed to accomplish anything over and above what
could have been achieved by a downward .adjustment in rentes or
upward .adjustment in exemptions; since everyone got it, nobody
received ,a differential advantage© The Treasury felt that this kind
of canned income credit served no useful purpose and, in 19^ 3 ,
repeal w<as recommended in the interest of siiarl if ice.t ion*

if Tho..entire

not income could be substantially less than earned net
income in the cane of an individual with capital or business
losses*
2/ See Table 1«

£££?

Poreigft system's of djfforentjation

ïn .the light of the foregoing discussion of American experience
earned income credit, certain differences' in the systems of
differentiation developed under some of the foreign tax laws may he
not ed.
The British credit of one-sixth of earned income cannot exceed
$1 *0 0 0 .as an allowance against income subject to the standard rateSo­
it is not allowed for surtax and. it is viewed mainly as à v/orker’s
credit* Unlike the former American cred.it» it d.oes not contain a
broad presumption that a certain amount of income is earned, but
starts with the- first dollar of income actually earned,, 1 ] like
the former American credit, it ceases to be applicable beyond an
upper limits $6,000, This limit and the percentage of earned
income allowed have varied from time to time in response to changing
revenue requirements and tax policies«
The Canadian system.of differentiation between earned and
unearned, income takes the less usual form of a special tax Of  per­
cent on unearned, income* It is unlike the British credit because
the first $1 ,8>00 of income from any source is exempted from the
h-percent tax and, therefore, it is in effect treated as earned*
Another important.difference is that the Canadian method of differ­
ent iat ion now has no upper limit on the amount of 'income which i s ' **
treated as earned 0 Prior to the taxable year ,lÿ+l,’however, all
income in excess of $lU 9000 was treated as unearned»
. The.Australian system of differentiation’is, in a sense, a
cross between the British and Canadian systems/ The Australian
law has both a lower limit of.$ 6U& bçlow which all income is
regarded as earned and a top limit of $ 1 6 ,200 ’
'above .which all '
income- is treated as unearned, Within these; limits, differentiation
in favor of earned income is accomplished by. applying two separate
rate scales, the lower one to earned income, 2 /
¿7

A credit of five— sixths of -.earned income.is also allowed a", working
wife« This allowance increases the marital.exemption by a maximum
■of $440 when the wife’s earned income .is $523 or over»
In the case
of persons 65 years or over.the first $2 ,0 0 0 of income is also
treated as earned whether earned or not*
2/ That is, in determining the taxpayer’s liability, the Taxation
Department computes two tenat.ive taxes on his total income?
a) under the earned income Schedule, and b) und.er the unearned
income schedule. Then the average rates determined, from each
of these two tentative taxes are applied, to the appropriate
amounts of earned and unearned income, respectively, to find
the aggregate tax liability*

In Great Britain the maximum amount of differentiation in favor
of earned income is $ 2+50 l/at $6,000 of earned income, or about
20 percent of the tax on unearned income and about 12 percent of
the unearned income remaining after tax* Under the Canadian law :
there is no maximum, ^ percent being allowed in favor of. earned income
without an upper limit* However, at $30,000 of net income the amount
of differentiation is $1,128 in favor of earned income, which is equal
to 9 .percent of the tax on unearned income and about 6 percent.of
the unearned income left after tax. In Australia, the maximum credit
of $811+ at $ 1 6 ,2 0 0 of earned net income is about 9 percent of the tax,
on an.equal amount of unearned income, and about 11 percent of the
unearned income left after tax, 2 /
.

1

The comparative work incentive aspects of these three different
earned income credits are-difficult to judge. Table 3 presents figures
which indicate that the United Kingdom and Australian credits are fcf^
a, size likely to stimulate the work incentives of wage earners, provided
the demand for additional wage income (under $ 5 ,000 ) is damped by the
high rates of tax in these two countries. Moreover, the Australian
credit probably has a comparatively greater stimulating effect than
that of United Kingdom above the. $5*000 earned income level. The
incentive effect of the Canadian credit appears to be comparatively
mild below $ 5 ,0 0 0 , but above this level it increases in relative .
importance,
IV,

Bases for an earned income credit
A,

Equity arguments favoring an earned income credit

In an historical sense, it is perhaps less accurate to view the
earned income credit as a method of diiferentiating the income tax in ^
favor of earned income than it is to regard it as a provision for
equalization. That.is, historically the qredit may more properly-be
viewed as a way of placing earned income on the same footing as
unearned.income in striving for a homogeneous total of income that can
be used as ah appropriate index of taxable capacity,
A goal under the income tax law in this country is to reduce all
the different types or sources of income to a common denominator of
taxable capacity by allowing with respect to each type the costs and
expenses that can properly be regarded as incident to the acquisition
of income. But even after all the various costs and expenses are

1y
2_/

$6 U 8 if the full working wife credit is considered..
See Table 2 .
'
‘-

12
- 6 - "
allowed, some of the sources of income may st i.
11- have certain peculiar
cliaracteristics which may heed to he taken into account before -aggre­
gation .and subjection to > uniform -system of graduated rates* This is
recognized, for example, with respect to long-tern capital gains*
Here the income may have accumulated over .a substantial period and-,
because’its realization is "bunched, n it is accorded’a reduced .rate*
'
Certain peculiar characteristics are recognized also with respect to
business income which is accorded partial averaging by means of loss
carry-overs* •The. proponents of an earned income'credit generally hold
t.hht there are also pecul iarities of earned income that call for some'
special adjustment before it can be included in the 'tax’base on the'
same'footing with unearned income®
In the past., a number of reasons have been presented in support
of the .'contention that a special credit for earned income is needed
before.the taxable capacity of such income can be considered equivalent
to that of unearned income* 2’irst, earned income is said'to be net to
a lesser degree than unearned incorno* The recipient of income from
dlrbct personal effort-, unlike the recipient of income from capital,
is nbt allowed" a deduction for depreciation«
I V is maintained that a"
similar deduction should bo granted to recipients of earned income
since, their productive capacities declino with age hnd are uitiaately
exhausted* -'The 'determination of the proper amount of such deductions
v/ould bo extrómeiy difficulty if not entirely impracticable*’" "As a**'
practicable' substitute, an earned income credit is urged I n the
attempt' to "defray some" part of the decline ih valub cf the'" workeh* "t “-

1
ìorcover, since the recipient of unearned income hltbady has
fund of capital on which to draw,' his taxable'- capacity is grentèr-thhU-::
that of the.person W h o ..lives entirely on earnod income*, The...latter
must save to meet extraordinary expenses and provide- for his old age Vi
and for-his heirs* The former already has savings and incefiie; to'meet these heeds«
' ‘
•
n- •;
THirther,' a Wage da^rner^ s living expenses may be' highCir''thnn;thòsc
of an- individual with a. like amount-' of income living on- intorest-or'
dividends,'because' the wage"earner m a y be compelled to reside -in an
expensive area to be-n'Oar his place 'of--oEplo'sÉiont.»"-- 'Sinilar3?y9.'--it"is
somc:timeb-ima.inta,incd that-.high^'sala-rled executives- in." orderate ■maintain
their prestige-' in' business circles must' often, support a/ subs tan tiaily
higher "plane Of living- than "they would voluntarily underthkOa t Such
extra, costs of living are not deductible from the wage or salary éarner1s

1

7

-

, , inponc.for. tax purposes* .AXso t the recipient, of earned .income, often
doe.s not-have thp.leisure to.,shop carefully*/ Such. .additional expend.-itur.es introduce .differences 4 n.. t^^tji^lty^to—pay ..income taXos among
individuals with ^hep same" nonin&iinp'onç*. Xj fïhuè, van éarnod in.conc
credit is urged in.lieu of special daductiops .'for;any additional,
•expense of earning income, sinee;these expenses! would ho. difficult -to
measure .and .administer» ; . , . \
. „J /
.
„:
. . -,-,It has also 'been maintained that, earning.income -involves greater
.psychic-cost.or sacrifice than, the passive receipt of unearned income*
because working is less pleasurable tj^an altbr'natiyô pursuits permitted
by leisure* 16 the extent that this, is,thé case, special ..relief for
earned income would be warranted from the equity standpoint*
.. .. Although, earned income appears-to. fluctuate more .than, unearned,
income, ■oxily-unearned and business incomes enjoy theaveraging.effects
..: of loss carry-overs and capital gains treatment* ;Consequently,1/thQ
annual taxation., of •earned income .may ..prodube,a !heavier /burden than is
imposed on.,unearned income* Further, many of the, larger earned incomes,
those.of-busine ss. -executives, movie stars and, profcssional athletes,
for example., ..are often temporary* Many of these. earners con.„pxpcét
..:the.i.r,high,incomes, to last perhaps less than a .deça^do!*. ..^ch j ’bunchcd11
.incomes arc hit especially hard owing to the operation of progressive
rates* ’That’.,is*. under .the present system, of determining income ;tax
liability on an annual .accounting, basis, the more- variable, •and-.thp..
more .’•bunched*1,incomes are taxed more, heavily oyer a,.period of. ye cars
than the evenly distributed, stable incomes. 2
The same progressive
rates applied to caverage lifetime earnings, for .example,..woul d permit
.. most.taxpayers to enjoy a substantially higher proportion of their

J

TJ Belief for earned income has also been advocated on the grounds.
-•that it-,would, equalize the tax burden between,.the, family-:v/here
the wife is gainfully employed and the family i/here .the. wife^
;
contributes to real income by her full-time occupation with the
. , .housework*. In the former case, aside from the, decreased-.house—
•work performed by the. working wife, there -'nay be added- expenses
.. .of domestic help and. Insufficient tine for careful .shopping;.
-,;which ;do not -arise in the latter -case* „.However* a goneç^l^parned
•
• income -credit would not- solve this; problem, for whore -the nearned
- ■, • :incomes :of ■these two .types ;0 f; family.are equal they *.would get the
;:same ariount of c rédita •..fhus*; a.-.special/-wording—wife credit ¿would
* Kf* •be necessary ..to. handle.-Hhis problems ;
»,*
- -2/ Section 107 of the Internal Revenue Code, in effect, provides for
the averaging of income earned over a period of three or more years
when at least SO percent of such earnings are received in one year*

aggregate lifetime- incones.' Unearned incone, in '-general* seems to
receive more '-favorable treatment than earned income.‘because of the
averaging effects of loss carry-overs ahd capital gains 'as:we.il' asthe- tendency .toward less fluctuation«..;.-;
’ ’
” -:
..'
i
:I’ihally, --except, in ’columnity--property States, recipichtV of -•
earned income -do not;have the.' sane -opportunities^'as individuals;
•with' -unearned income to avoid -the full Anpa-ct of the higher’progressive
rates»i" The 'recipients-*of unearned income- can, frequently maneuver into ■■one tax-haven or aho-ther-,- by using trust’arrahgembnts, and “
by .otherwise
splitting the property and in come.' among family^ members» 'Such avenues
.of escape are Largely closed- to the .earnings of business: ’executives
"and.-others with substantial-/ amounts' of earned income» : Temporary
successes, such as the use cf tox-*inspirod family p a r t n e r s h i p .have
usually cone to grief» 1J
-:
: -H '
i\ r
| ;.:v

B*

f‘

■' * 9 -p,

'•/- ■' . .j .. v ;f |

-• - ..-B. ■

.

Incentive, arguments favoring an. earned income credit

Recently,.' representatives of .‘business executives .have urged an
earned income' credit as d method of reducing the .income tax for work
incentive purposes«
It is claimed tlv.it under, high-, tax rates business
managers cannot be expected to contribute tbcip utmost.to the expansion
of business« The. very, existence of a dynamic economy and the future
development of the country are said to hinge upon the adoption of
measures to relieve- business managers from -their: .heavy tax'burdens®
The-, tax system;-should leave them with ample prospects of improving
'their economic, positions .as they climb "from .job to job’ up the scale of
ever-increasing 'responsibility» »The present ytype of tax system is said
to leave too small -,a. step—up in the;cOr^ensatipn n-ftpr taxes of* a lessor
official as he moves up to become president'- of the firm«\ ; '
•’V --d- few -illustrations may more-' elcarly indicatpythe n'aturb'Of this
problem»' .Under present lav/, Z] the'junior executive who, is married
but ¡without dependents and gets a' chance to move up, from'a $5,000 to

.'.Duces v« Sari, 281 U» S'«. Ill; Commissioner of- Internal "Revenue v»
Tower, 327 U*S* 2gC; husthaus -v»."- Commissi oner-, of Internal Revenue,
•:•3.?7-'^«s* .593« Sep' .also the, Division of Tax Research study entitled
- "The ;Tax Treatment o f .Family Income,n June 19 H 7 , Appeiidix, A .
2/ - Internal Revenue Code a s ‘amended b y ‘the Revenue Act of 19 ^ 5 «

a $10%000 job can keep ever throe-fourths of the increase» 1 / If he
neves from a $1 0 ,0 0 0 to a $15»000 position, he can still keep more
than two— thirds of the $ 5»000 raise«. • The nore seasoned executive,
who sees Va, chance ,of making $ 2 5 ,0 0 0 ins tea,! of $15 »0 0 0 , knows he can
keep somewhat less-than $6,000 of the additional $1 0 ,000 * However,
the $35»000 executive of today who is evaluating a, $ 5 0 ,0 0 0 offer
also knows that he can keep only a., little bore than $ 6 ,0 0 0 of the
$15,000 increa.se* The highr-priced executive who moves up from the
$ 75,00 0 to the $1 0 0 ,0 0 0 level "before taxes moves up only $ 7 »5 QO
after taxes to about' $U5 , 000 from about $37,500* The $50,000 differ*
once between the $ 5 0 ,0 0 0 and the $ 1 0 0 ,0 0 0 executives before t.axes is
whittled down to a difference of about $l 6 ,0 0 0 by the income tax,
leaving the two executives with respective amounts of income after
tax of about $ 2 9 ,0 0 0 compared with about $h 5 ,0 0 0 * 2/
V.

Cost and impact of an "earned'income credit

Before attempting to appraise the equity and incentive aspects
of an earned income credit, it is necessary to consider the size of
reyonue loss involved and the effects on the distribution of the
income tax burden*
As indicated 'above in the sections discussing the use of
earned income credits in the United States and certain foreign
countries, there are a number of methods available for reducing the
relative tax burden on earned, income under the individual income tax.
As a practical matter, however, the selection of methods is limited
by the desirability of fitting the earned income credit.within the
administrative requirements of tho existing individual income tax
.structure* Two illustrative methods which appear to be administra­
tively feasible are:
(l) a credit of 2 percent of earned adjusted .
gross income to be-allowed against a tax tentatively computed with­
out such credit, and (2 ) the allowance of 10 percent of earned
adjusted gross income as 0. deduction from income in arriving at
final tax liability* J/

IT

2/

See" Table h, the ’‘present law” group of tax computations#
In;com­
puting tax under present law, it was assumed, that net income is ninetenths of adjusted gross income at all income levels, and that salary
was the sole, source of income*. If net income is more than nine-tenths
of adjusted gross income, the taxes would bo larger and the amounts,
loft after t.axes would bo smaller than illustrated,
Derived from Table h*
In both cases earned adjusted gross income has been selected as tho
basis for measuring tho earned income credit since over 20 percent of
the individual income taxpayers use either Born ¥— 2 or the Supplement T
tax table method, of determining tax liability and do not compute their
not incomes under present procedures*
Consequently, to require these
taxpayers to find their not incomes for purposes of tho credit would
introduce undesirable complications for both the taxpayer and the Bureau
of Internal Revenue* The" compliance and administrative asnoots of an
earned income credit arc more fully discussed in Section VII, below.

-

;

10

~

D 1 stric t 1 on of'•taxburden under Illustrative earned
■ i n c o I n ( T creritt.g

.

r

,..

.

.

.
The method of allowing 2 percent of earned adjusted gross incomeas a credit would provide proportionately greater tax decreases at the
lower income levels than at the higher income: levels, Tims, for a
married-wage earner with no dependents and with wages' of $3 ,0 0 0 ,;the •
tax decrease would he $66 or about 19 percent of the present-law tax.
The percentage of tax decrease resulting from the credit would be
reduced to about 11 percent at the $1 0 ,0 0 0 level of earnings, and to
roughly 7 percent at the $25,000 salary level. Above this level the
percentage tax decrease would decline to roughly h percent between
$ 75»000 and $1 0 0 ,0 0 0 and to roughly 3 percent between ¿¡>1 5 0 ,0 0 0 and
$2 0 0 ,0 0 0 . 1/
. . .
••••
tax decreases when expressed as a percentage of-adjusted'
gross income remaining after the present law tax would result-An
increases-in disposable income of from 2 percent to 3 percent between
the $3 ,0 0 0 to $2 5 ,0 0 0 level of earnings; increases of 3 percent to
4 percent in disposable income between the $35»000 and $75»000 salary
levels; and from k percent to 6 percent between the $1 0 0 ,0 0 0 .a n d '$2 0 0 ,0 0 0
levels of earnings, l/ These'figures indicate the increases in income
after tax which would be available to meet any special expenses of*
earning income. This method probably could not be expected to add
appreciably to the incentives to work since it would reduce “the taxes
applicable to additional earnings", or increase disposable income by '
only 2 percent of such extra earnings. 2/
\
The provision of an earned income credit by means of a deduction '
of 10 percent of earned adjusted gross income, however, would, result
in noticeably larger amounts of credit for the higher income earners.
The tax decrease at the $3,000 level would be about lb percent of
"
present law tax; about l^J- percent at, the $10.,000 level; about 15 percent
at the $ 2 5 ,0 0 0 level; about 1 3 percent- at the $7 5 ,0 0 0 to $1 0 0 ,0 0 0 level;
and roughly 12 percent at. the $ 1 5 0 ,0 0 0 to $.200,.000 'levels, l/
The increase in earned, income after present law tax is also noticeably.different under this method of allowing .an barred income'credit
from t h a t•under the 2 -percent tax-credit 4 rising from'about ,2 percent
•
to about 7 percent between $3 ,0 0 0 and. $2 5 »00.0 , to 10 percent at the
. ,
$ 5 0 ,0 0 0 level, 16 percent, at the $1 0 0 ,0 0 0 level, and -22 percent at"
the $ 2 0 0 ,0 0 0 level, l/

-f /. ..'•■■■
1■ '■ ■r;; -:M-'' ' \IL '' U
1
2y .That> is, excepting taxpayers at the-lbwest part of the income -scale.
See Table
--

YJ .'See Table 5» ' ' '

4. XI Table 6 shows that this method would allow somewhat smaller tax
decreases for wage earners below the $5*800 level than under the
2-percent tax credit, and that it would provide increasingly larger
amounts of tax decreases for executives and other high income earners.
The differences between these two illustrative methods indicate that a
credit a l o n g ;the lines of the 10—percent-deduction method would be more
suitable for .work incentive purposes than one of the 2-percent— taxcredit type* since it gives appreciably greater tax relief for the
higher earned incomes.
It should also be noted that, the method of crediting a given
percentage, such as 2 percent, of earned income from a tentative tax
implies that the additional sacrifices and expenses incurred in earning
additional income increase proportionately as earned income increases.
A deduction from income, such as 10 percent of earned income, implies
that the additional sacrifices and expenses incurred in earning addi­
tional income increase more than proportionately as earned income
increases. The deduction method is more consistent with the generally
accepted view that the additional units of effort required to earn
additional income tend to have increasing disutility."
B0

Cost of illustrative earned income credits

Although the impact of the two illustrative methods on the tax
burdens at various income levels would differ significantly, the cost
of the two plans would not differ greatly* Assuming income payments
of $166 billion, 1 / the 2-percent tax credit would cost about $1 .9
billion or 11 percent of the estimated total tax liability; the
10 -percent deduction would cost about $ 2 .1 billion or 12 percent of
the total tax liability. 2 /
The distribution of the revenue loss by income levels would roughly
parallel the distribution of the earned adjusted gross income reported
by taxable income recipients.
The estimates in Table 7 show that
approximately 77 percent of the total adjusted gross income reported
by taxable income recipients is attributable to earned adjusted gross
income.
However, earned income accounts for about SH percent of
the total income of the. net income group under $5,000, and only about
48 percent.of the total income of thé net income group above $5,000.
Moreover, the proportion of total adjusted gross income accounted for
by earned income drops rapidly from about 65 percent for the net income
class $5,000 to $10,000 to less than 25 percent for the income class

¿ A T h e definition of income payments used here is the unrevised concept.
See nNational Income Supplement to Survey of Current B u s i n e s s , J u l y
l9*+7* The current level of income payments is higher than the $166
billion level assumed when these estimates were, prepared. The 'higher
level of income payments would raise the amounts of the revenue
losses involved, but the percentages of the revenue losses to the
total tax liability would not be changed appreciably.
2/ See Table S for estimated amounts of tax decrease under the two
illustrative methods and Table 7 for the estimated total tax lia­
bility.

15
-

12

-

$ 1,00*000 to $ 250 ,000 , and 3 percent for the income class $1 million
and over* 1/ Accordingly, the bulk of the revenue loss from thè earned
income.credit will tend to be allocated to taxpayers-with incomes of
less than'$5*000 irrespective of the type of plan* Conversely, the over­
all incentive effects will tend to decrease as incomes increase, since a
smaller proportion of the total income is affected«»
Under either of the two illustrative methods of allowing an
earned income■credit, about UjcS million income recipients would have
their taxes reduced. Of these, about U6«2 million or 97 nercent would
be' wage and .salary earners with net income under $5^000. Under the
2-percent method about; H*5 million of these wage and salary earners
would be made entirely nontaxable, and under the 10 -perceût method
about U *3 million would be made nontaxable* 2j
'
Approximately SS percent of the tax reduction under the 2-percent
method would go to the net income group below $ 5 j000 * while about,
7S percent of the revenue loss would go to this group under thè 10 —nereent
method« While the revenue loss to the under $ 5 ,0 0 0 group is roughly‘the
same under the two methods ($1,6SS million under the 2—percent method and
$l,o 22 million under the 10 —percent method),- the amount of revenue loss
allocated to the income group with more than $5*000 of incòme is about
twice as large under the 10 —percent method($H 70 million) as under thé
2-percent plan ($.237 million)* Thus, the greater revenue loss under the
10 —percent plan is entirely attributable to the larger tax savings which
would p e given to those with incomes above $5,000« However, while the
revenue loss to those with incomes under $5?000 is between 17 and IS percent
..of their total tax liability* the revenue loss as a percentage of total tax
liability ..for those with ,incomes over $ 5*000 is 3 percent under the 2—percent
method and 6 percent under the 10 -percent method«
C*

Modifications.of illustrative earned income credits

X* Presumption that all income below a certain amount
is earned

.

,

In earlier experience with the earned income credit in the
United States, it was presumed that all income below a certain level

Table J*
2/ Table S*

1/

- 15 with the size and nature of the "business. Thus, a small farm with little
mechanical equipment probably produces its income chiefly through the
personal efforts of the proprietor, A farm with substantial amounts of
capital in milking machines, tractors, and harvesters owes a greater
part of its income to capital than to direct labor* Similarly, the
income of a service business such as a research agency is more largely
a function of personal effort than the income of, say, a motion picture
theatreV It. would .be administratively impractical to make actual
measurements, of the earned portion of such business incomes.and there­
fore some rather arbitrary presumption must be made, 1/ In theUnited States, 20 percent of the profit's of partnerships and single
proprietorships, has ;;been presumed to be earned. ; In foreign countries
the inteiprstation has been broader, Great Britain, Canada, and
Australia generally counting all business income as earned. 2/ A 2 (^percent
presumption tends to understate the earned income portion of profits
derived from small,, labor-using business, while
a 100 -percent pre­
sumption tends tc give an undue earned income credit advantage
large, capital-using business.
In the past, the presumption that the
first $3 ,0 0 0 or $ 5 ,0 0 0 of business income was earned, tended to give a
practical solution to the equity aspects of this problem .oecause of
-its sliding-scale effect when coupled with the 20 -percent^business
income presumption. Bor example., under a $ 5 ,0 0 0 presumption, 100 percent
of the business income would be treated as earned up to $ 5 ,0 0 0 ; between
$ 5 ,0 0 0 and $1 0 ,0 0 0 , the percentage treated as earned income would
decrease from 100 percent to yO percent; between $1 0 ,0 0 0 and $2 5 ,0 0 0 ,
the percentage would decrease from 50 percent to 20 percent; and above
$2 5 ,0 0 0 of business income, the maximum percentage »hat could be claimed
as earned income would be 20 percent, This type of presumption, if
.applied only to the business incomes of proprietors and partners
•
actively employed in business, would not appear to be subject to the
full force of the equity criticism discussed above in connection with
a presumption that a minimum amount of income from any source be
treated as earned,*
...
The total amount of trade or business income of taxable income,
recipients is estimated to be $19 billion, at the assumed level ol
$l66 billion of income payments. Thus, the tax effects between a loinH
and a high-percentage" presumption can be expected to be relatively
important. Bor example, under the 2-percent-tax-credit method, a
20 -percent business income presumption would account for a revenue
loss of less than $75 million, while a 100 -percent presumption would
cost more than $300 million*

1/

House Report He. 179, °P* d t *
Great Britain and Australia apply top limits to the amount of income
which may be treated as earned* thereby curbing the tendency of this
presumption to overstate the portion of profits attributable to wages
t.' "of management for purposes of the credit.

2/
*”

17
— 16 -

VI*

Appraisal of the earned, income credit

;

Ip considering the incentive and equity arguments in.favor.of •an earned income credit which have already been presented above, it
should be clear that even the most objective appraisal must necessarily
rely on opinion and judgment, since factual answers to all-, of- the complex issues are-unavailable and the responses of taxpayers.to theequity and incentive aspects areedivergenty
~
*
nA*

Equity aspects of*the earned-income credit

The arguments .against an earned income credit either deny that
the tax.structure discriminates against:earned income or contend
that ..the credit is at best only a rough, and perhaps outmoded, approach
toward achieving more equitable, tax treatment for earned incomes,. Thus,
if earned incomes have special costs and expenses which ought to be
allowed as deductions,then it is raor e ‘equi table to allow them directly,
since the. credit would not differentiate between equal amounts of earned
income with substantially different amounts, of costs and expenses* ITdr
can it be said that all earned'income involves greater psychic sacrifices •
than unearned income. Such a view overlooks both the psychic cost of
saving often, if not always,• involved i n ‘accumulating thè capital producing
the unearned income, and the unearned portions of the so-called earned
income received by those individuals in positions’or professions in which
employment opportunities s,re limited by considerations other than capacity
to do the work.
-■
The depreciation argument is really motivated by the desire to help
recipients of earned income to save an' old-age fund. More adequate
provision for old age might also.be made through perfection of the
social insurance system, rather than the réintroduction of an earned
income credit. Moreover, high income, earners who depend primarily
on company or staff pension plans rather.:than social insurance already
receive-special treatment under the pension-plan' provisions of the
income tax.
:■
■- •
As to equalizing the capital gains and the loss carry-over’advan—
io-gos accorded unearned income, it would be more equitable to introduce
adequate averaging for all incomes, both earned end unearned.- Averaging/'
would solve the issue of variability of incomes and, in addition, might
be helpful in setting to rest the, ever— recurring problem of capital gains
taxation. A n eapned income credit would not Solve -thede'vexatious.problems.

Neither can the earned income credit he viewed as an effective
offset to the tax-reducing,.income-splitting opportunities available
to recipients of unearned incomes. Here, too, there are more direct
approaches, such as compulsory joint returns followed by the British
income tax, or allowing all incomes to be split equaXly between
spouses analogous to community— property treatment. 1/
Even if it is concluded that an individual's ability to pay the
personal income tax is less when he receives earned as compared with
unearned income, when all of
the Federal, State and local taxes are
considered, it is extremely difficult to say that earned incomes
are treated less favorably than unearned incomes. On the.one hand,
local property taxes, the corporate income tax, and the estate and
gift taxes are regarded as falling on unearned income and as providing
substantial differentiation beti*;een earned and unearned incomes, Al$o,.
insofar as large incomes are in larger part unearned than earned the
graduated surtax rates already impose a heavier burden on unearned
incomes. On the other hand,
the property taxes and corporate income
taxes may in some measure be shifted, and
the sales and excise taxes
tend to weigh heavily on recipients of earned income. On balance,
one cannot measure the extent of the discrimination, if any exists.
Incentive aspects of earned income credit 2/
— X,; High taxes and total effort
There is no question but that some income taxpayers respond to
either a high level of tax or high rate of graduation by a reduction
in efforto The questions unanswered are the extent of the reduction
in physical effort, tfre effect on the psychological outlook towards
hard work and the monetary reward for work, and the effect on the v
quantity and quality of the R a t i o n s production. Finally, there is the
question . of the role that an earned income credit can be expected
to play* These questions call for objective, quantitative answers*
Hone is available* Resort must be made, to what_”appear to be reason­
able considerations for and against the general presumption that
the individual income tax decreases the incentive of individuals to
earn additional .income.

17
2/

See nThe Tax Treatment of Family Income,” op* cit, ~~
"
For an interesting discussion of work— incentive effects of the
Postwar I British Income tax,:see Great Britain nReport of the
Committee on Rational Debt and Taxation” (Colwyn Report), London,
1927, pp* 12S-X51,. 158-16U, and 379-3S1.

- IS -■

•"

Two c ons iderat ioqs sapport this .presumption.
tHeJcone-'h^nd-/;, ...
thêrê" is the principle that additional units of -fndome tend-tQ -.have':,-. -,
decreasing u t i l i t y ‘■•whereas, additipnal units of effort required, to
earn~the additional income tend tq :have|increasing’disuti1 ity * g--Asi.de
from the. tax effects ÿ individuals normally choose leisure over;income
when; the 7 .disutility of additional'effort is thought-' to 'bè greater . :
thah... the utility'of the; additional income likely^ to" he earned,. '
Under;; these conditions, ,a graduated income;' tax' tends to lower the
level^of ••effort' at which additional income is "“chôsën over ■leisuxe,'1-.'.sinc,e graduation of tax pates- leaves, the individual with' decrcasingly
smaller amoixnts of additional income after tax to compensate h i s g ~ - '
"
s
'Consequently,, a n .earned income cfOdi t of -the, - ..‘.;
10 -percent-aeduction type should tend to increase' the. ihcentiye to­
wer lë*/since it reduces the level of taxation and raté of graduation. *• .•
applicable', to earned. Income .

- . &ga.insl these considerations which support the presumption; that .: an earnedv-income credit.-would increaso incentives to work must he r
weighed other considérât ions whichmsy.more'or'leSS'hffsèttheîn.S inee^ t'h|- impact of r;the income tax on .the individual’s'’.incentive’ to -; work 1 ? in consider ahi e„.part psychological.,.his acceptance of -the. ’? /
fa fine ss of the c^is tribut ion. of. the tax burden and of -the- desira.hility
of the ^purposes of the high ,taxes ;condì tion:his; willingness to Work ; ;
to an important extent. , Tzius, the wartime needs brought forth wartime
efiort . Most everyone worked-harder ;in spite of ever*-increasing taxés
and other wartime.-,restrictions with ■decentive effects«' Postwar' transi-«
tional needs.,-: heing more controversial, must he expected:to provide a.
substantially smaller offset to the work-decentivé effect of thè income
ta^, ■However,' for many -taxpayers., these transitionaX^&eeds’.provide
_important if -not entirely satisfactory reasons for high taxes and;
-consequently^ 'their incentives.;'to work may not, he materially* reduced,
Other taxpayers -may be, substantially depressed by what they"consider
to he an unreasonably high or unfair tax'hurden, their’unhappiness
finding a, partial outlet in a-reduction of the '.quantitv or quality of
their"'effort. .
; -,
v
Another off set ting •consideration, is based on -the. "high demand for
income by '.many .individuals who *desire to maintain .'relatively fixed or
even increasing levels of -consumption and ^saving.
If taxes" take
'l
lqrger^ proportions of their 'incomes, the incentives of, these individuals
to work tend'to be increased:, rather .than decreased." They will, try,
within the limits \of their abilities,- energies., and opportunities :.to
'
earn more to attain hnd maintain the desired incomes, after taxes'.'
f

-

19 -

A tax reduction would tend to reduce their incentives to w o r k and slacken
their efforts, since their objectives could he met with smaller incomes
before tax. Actually, the decentive effects of high taxes on some tax­
payers may provide otherwise unavailable opportunities for other taxpayers
whose incentives to work have been stimulated. Thus, the opportunity for
additional income turned down by an'older, successful high-income profes­
sional or businessman who feels the added income after tax not worth his
while, may be taken-by a younger, aggressive substitute whose demand for
additional income is high and who still has his mark to make. The work
is done in spite of the high taxes, perhaps with less finesse, quality
and smoothness in some cases. Others who do not find the needed oppor­
tunities in their current lines of work to earn more income to neutralize
the tax (and other) effects on their standards of consumption and saving
may move into other jobs of businesses where there are better chances of
earning more. Others falling in their attempts to- earn more may demand
higher compensation for the same work and lower taxes, 'Finally, some
taxpayers may resort to schemes of tax avoidance and evasion as a way out,
Even those whose incentives to work are decreased by taxes are limi­
ted in the extent to which they actually can reduce their efforts.
Officials and proprietors of going concerns cannot turn down important
clients, customers and income-producing opportunities because their
competitors will not. Their positions and businesses must be protected
from inroads likely to be made by their most aggressive 'competitors who
are least affected by the high marginal tax rates. Moreover, hope
springs eternal that future taxes will be lower and that the incomeproducing opportunities taken today will become more 'worth while.
Similarly, the high-incom^-before-tax employee: must g profact
his position against aggressive, . potential competitors from
within the business organization by meeting the work standards of the
organization. These taxpayers may be unhappy, believing that the taxes
are unreasonably high and leave them too little to show for their efforts,
but they are not free to reduce their, efforts accordingly.
In view of the foregoing considerations and in the absence of
objective, quantitative information, there may be a real question as to
whether the high rates of tax have in the short-run actually reduced
the total effort materiaily even though bn balance the incentives to
work may have been reduced. Over, a- longer period of time, »the momentum
of the economic system may be slowed down by a- persistent feeling that
taxes are unreasonably high and unfairly distributed, .This feeling,
however, is not exclusively within the purview of high-income taxpayers.
Uow that prices are high and the cost of living rising, low-income taxpayers^are demanding higher exemptions and lower rates so they may have more
money after taxes to spend, . But relatively moderate changes in these
mass taxpayer areas have drastic effects on the revenues, while, as often
pointed out, substantial rate reductions among upper income taxpayers
involve relatively moderate revenue reductions under the individual

-

income ta x * 1 /

20

-

•

F in a lly , even assuming that, a ta x red u ctio n w ill on b alan ce stim u la te
in c e n tiv e s to work 'and le a d to g r e a te r output of e f f o r t , th e re i s uncer­
ta in ty re sp e c tin g th e su p erio r e ffe c tiv e n e s s o f an earned income c r e d it
compared w ith a lt e r n a t iv e methods of ta x re d u ctio n ’-»
2.

The supply o f execu tiv es ■

In th is country, the .current concern w ith the d e ce n tiv e e f f e c t s of
high income ta x e s on w illin g n e s s to work i s p rim a rily d ir e c te d towards
the higher income e a r n e r s , p a r t ic u la r ly in th e b u sin ess f i e l d . E x ecu tiv e
c a p a c ity -is undoubtedly a r e l a t i v e l y s c a r c e commodity,- An earned income
c r e d it which s ig n ific a n tly " d if f e r e n t ia t e s - a g a in s t unearned income would
tend to draw a g r e a te r supply of e x e cu tiv e e f f o r t in to the tax—fav ored
area: .away From the - d iscrim in a te d a r e a . The r e s u lt s might be more n o tic e ­
a b le in the long-run than in the s h o rt-ru n because new e n tra n ts drawn
in to th e bu sin ess e x e cu tiv e f i e l d r e q u ir e exp erien ce and train in g -' not
o r d in a r ily o b ta in a b le elsew h ere. The sh o rt-ru n supply might be in c re a se d ,
however, by the added inducement to e x is t in g e x e cu tiv es to -maintain and
in c re a s e t h e ir e f f o r t s . The apparent sh o rt-ru n supply might a ls o be
in creased by,drawing from a re a s more or le s s c lo s e ly r e la te d -to the
b u sin ess execu tiv e f i e l d , such as investm ent coun sel and prom oters of
b u sin ess v en tu res. As a lre a d y noted above, th e re must a ls o be considered
the o f f s e t t i n g e f f e c t s a r is in g from th e f a c t th a t n o t 'a l l ind ivid ualsrespond to a given stim u lus in the same way.
There i s a ls o a q u e stio n whether an earned income c r e d it would
a t t r a c t enough a d d itio n a l t a le n t away from competing f i e l d s to make a y
s u b s ta n tia l improvement in the q u a lity "and number o f good o u sin ess
managers. F i r s t , rem uneration is a major f a c t o r but only one o f the
determ inants df o ccu p a tio n a l c h o ic e s . Second, th e n e t income of
p ro fe s s io n a ls (perhaps th e g r e a t e s t r e s e r v o ir of needed, bu sin ess
ex ecu tiv e c a p a c itie s ) would, o r d in a r ily be c l a s s i f i e d as"earn ed income
and, consequ ently, p r o fe s s io n a ls would be in th e same fav ored p o s itio n
as b u sin ess e x ecu tiv es .and would not need to Change t h e ir o ccu p a tio n s.
However, many p ro fe s s io n s (such as law, acco u n tin g , .and en g in eerin g )
d i r e c t l y serv e e ith e r as a id s to b u sin ess or as the f i e l d s of e x p e rien ce
lead in g to execu tiv e p o s itio n s , so th a t s tim u la tin g in c e n tiv e s in th ese
areas may, in e f f e c t , be tantamount to in c re a s in g th e supply of b u sin ess
e f f o r t . Iloreover, a low presumption (s u c h 'a s 20 p e rce n t) r e s p e c tin g the
earned income.from tra d e or b u sin ess o f p r o p r ie to r s and p a rtn e rs may tend
to induce in d iv id u a ls to h ir e them selves out as paid- managers r a th e r than
17

S e e r f o r 1example, Table F and Chart A, Statem ent of th es S e c r e ta r y of
th e 'Treasu ry,' H earings b e fo re the Committee on Fin an ce on K .R. 1,
SOth T3ongv„, 1 s t S e s s ., pp. 30 apd 33«

-

21

-

continuing in or entering into the business field as entrepreneurs.
This effect would not, of course, tend to increase the total supply
of business executives. Also, the individuals whose work incentives
are to be stimulated normally do not receive;their incomes exclusively
as earned income. Sooner or later, they all acquire property that;
■yields unearned income. As the data show, a smaller and smaller .
proportion of taxpayers 1 incomes is earned as the size of their incomes
increases* l/ For these taxpayers, the incentive effects, of an earned
income credit nay-be materially weakened, since against the benefits
of an earned income credit there must be offset the.additional taxes
on unearned income resulting fjrom the differentiation in favor of
earned income* The stimulus of an earned income credit is likely
to be weakest in the case of the seasoned business manager who has
climbed into the upper brackets of both earned and unearned income.
It is likely to be strongest in the case of the executive who is
working his way up and who has little income other than that which he
earns* 'However, the work incentives of the former are most likely to
be decreased by high taxes, whereas the demand for higher income and
aggressiveness of the latter may more or less offset the decentive .
effects of high taxes.
Finally, insofar .'as executive positions and hiHi—paying professional
positions do require special talents and do yield high-incomes even after
taxes, the absence of differentiation in favor of earned incomes may not
tend to decrease the long— run supply of persons capable of filling these
positions. That is, even though the compensation after taxes is no
longer as attractive as formerly under low taxes, the alternatives may
be still less attractive. Thus, even though the net effect of a sub­
stantial earned income credit may. be to increase the supply of effort
on the part of existing executives, it does not necessarily follow
that there will be a great improvement in the over— all supply of
executive talent.

3 * l.Tork incentives and investment Incentives
There appear to be no.good grounds"for regarding investment as ,
performing a less useful part than personal service in the productive
process. Many people believe .that a healthy and prosperous economy
depends on high levels of new investment.
Insofar as an earned income
credit differentiates against unearned income, there must also be
considered the likelihood that'incentives to invest' are equally
sensitive (or perhaps even more sensitive) to high taxes as incentives
to work,

y

mable y.

*

;

~

‘

’

'

la

It is extremely diffi<^lt\to cilassify* ecoûoîaic'activities into those
that merit'special tax concessions and those that do not«, It ray he
common ••to, regard those who participate, actively in economic affairs as
deserving more .favorable freatment •’■thah. 'those;who appear, to he the
passive beneficiaries of the économie-'system, .-Laborers, hired managers,
small businessmen, promoters, explorers, and the like typify the .active
participants. The coupon clipper-typifies- the passive beneficiary.
On close examination*.hoimeyerm. the problem. ,of.:-economic classification
is more difficult than a;t. first appearance:,, :-For. example, what is the
fundamental distinction between the economic ..contribution of .a hired
manager and an'active- investor who .directs his own capital now into
one .and then:into another 'venture?: - This type, of capitalist may be
just as active and 'pioneering and. just as-great a genius at promotion
and management as the hired manager himself, Most of his incorge would
not be counted as earned. Incentive-wise,. •it is not reasonable to
discriminate against him under the tax laws. It has b e e n .partly this
■inability to distinguish adequately, between the earned and unearned
portions of income jointly produced by- effort and capital, typified by
the proprietor or partner actively managing his own business venture,
that in- the past has led students of; taxâtion'to "conclude that the earned, income credit should be limited to moderate amounts of earnings-; 1 /
Moreover, as indicated above, none of the.types discussed — the
hired business executive, the small or large capitalist directing his
own investments, the promoter and the investment 'counsel directing other
people *s- Investments **>- is normally the type.- receiving .exclusively either
earned or: unearned income, Finally, not even against the coupon clipper
is the. case for discrimination clèar. In a capitalistic, economy,it is
a function of private individuals to provide the needed capital. Capital
derived from-the riskiest.common stock buys no nore'thaï; the-same amount
derived from gilt-edge bonds, Neither-do stocks necessarily involvemore active .management than.bonds. Investors holding- stocks-.nay.beyjust
as passive as those holding bonds,
0«

The earned income credit and alternative methods of reducing
taxes
' '
3 -; -7 £

It is also important to inquire how the incentive aspects of aà;
earned income-credit compare with alternative-ways- of reducing-taxes,
such as personal .exemption Increases, allowing married "couples,to split
'.their- incomes 50— 5 0 » elimination of double taxation of dividends, and
rate reductions'. '
, •
.

1/

Colwyn deport, op, cit., p. 132,

r

-

m -

An increase in personal exemptions would give the greatest relative
amount of tax relief to. the lower income groups without distinguishing
■between earned and unearned incomes,. Indirectly, by increasing the
demand of the mass of income taxpayers for goods and services, it would
normally tend to stimulate work and investment incentives».,
The chief beneficiaries of the proposal to split family incomes
would be the married couples in ,the middle and upper brackets residing
in noncomnunity—property States who receive all or most of their income
from earnings, but many high-income couples with unearned incomes in
these States would also benefit in varying degrees depending on the
extent to which their incomes are already split, 1/ Some incentive
response could be expected from adoption of this proposal, because
all of the revenue decrease v/ould go to taxpayers whose incomes fall.above the first surtax bracket.
Another alternative, reduction or elimination of double taxation
of dividends, runs counter to the- equity implications of an, earned
income credit, but-not necessarily counter to the incentive aspects
because business executives tend to have both earned and unearned
incomes.
If any of the proposals for the reduction or elimination of
such double taxation were to be/adopted, 2/ the scales would be tipped
in favor of unearned as against earned income. In a sense there is a
conflict of interest within business itself, the ownership group or
stockholders'gaining
a relative- advantage from adoption un ány
of the proposals that would relieve dividends and the hired managers
of business gaining from adoption of an earned income credit. Adoption
of both of these types of credits raises questions of discrimination
and incentives to obtain income from other sources such as. interest,
rents and royalties, and the unearned portion of income received from
proprietorships and partnerships. As substitutes for rate reductions,
these credits also have.the disadvantage of giving the rate .structure
a nominally high appearance which may have an undesirable psychological
effect on incentives.
G-eneral rate; reduction is still another alternative, especially
in the higher income areas where the high marginal tax rates are more
likely to affect the incentives to work and invest, Tke earned-incomecredit "method of stimulating work incentives has a distinct disadvantage
as compared with tax rate reductions in that it must necessarily give a

17
2/

nThe Tax Treatment of Family Income.H -pp, cjt,, p, 17»
For an analysis' of these proposals, see Treasury tax study ,rThe
Postwar Corporation Tax Structure,M December 6, 19^6»

M

Y*

4 • *'

'-, 2 b -

>

... • •

greater portion of the tax reduction to low-income receivers» 1 / who.
probably need very little, if any, tax reduction to stimulate their
incentives to work, "both because their taxes are relatively low and
because their needs-for additional income' are great. Moreover, the
earned income credit tends to have a damping effect on investment
because it differentiatosoagainst unearned income. . However, as indicated above and as shown in Tables 5 and 6 , substantial relief would..be
given to high, earned income recipients by a 10 —percent earned income
allowance, and it nay.have the advantage of tending to harmonize the
incentive and equity issues,.
Finally, if the Congress, as in t h e ‘past, were-to adopt an earned
income credit -with a presumption that the first $3 ,0 0 0 or $5 ,0 0 0 of
income from any source be treated as earned and with a relatively low
top limit above which earned income would.be treated as unearned, the
potential incentive effects would be greatly limited, the- equity basis
•would be weakened, and the revenue cost would be materially increased
by the minimum income presumption*
VII.

Administrative aspects of earned income credit

The, réintroduction of an earned income credit would add complications
to 'the existing individual income tax procedures’ from both the view­
points of taxpayer compliance -and of administration.by the Bureau of
Internal Revenue*
■

A.

Definition of earned income.

It is difficult to formulate an administratively simple definition
of earned income that is wholly satisfactory from the standpoints of
equity and. minimum'revenue cost. While the wage-and salary payments in
the typical employee— employer arrangements are administratively satisfactory
as a basis for determining an ee.rn.ed income credit, there- are other impor—
tant earned income ..areas where such arrangement are: absent or'inadequate.
Thus, the actual separation of the earned and unearned portions of trade
and business income is still administratively impractical.’ Consequently,
tiiis difficult problem, encompassing both equity and revenue’ issues, must,
as in the past, be handled by means of statutory presumptions. 2/ If
tne presumption that a certain percentage of trade and business income

¿7
2/

4

See Tables g and 9 . * —
See Section V, C, pp. 12 - 1 5 , above.

*

~

sr*

È

is relatively low (say up to 20 percent), then a second presumption that
a minimum amount of trade and business income is earned may he deemed
desirable in the interest of equity* Such presumptions solve the
practical problems but tend to raise the revenue cost. In practice, tax*«
payers tend to claim the maximum.percentage of trade and business income
as earned and the administrators tend to grant it*
In the past, the presumption that all income above a maximum amount
was unearned pla,ced a top limit on the tax value of the credit and
reduced taxpayer incentive to overstate his earnings* Llinination of a
top limit for the purpose of stimulating work incentives will also tend
to stimulate some taxpayers to choose income in the form of higher salaries
rather than profits or 'dividends, thus raising either the revenue cost of
the credit or administrative questions as to the reasonableness of the
salaries, l/
Since over SO percent of the taxpayers do not determine either an
earned net income or a net income under present simplified procedures,
it does not seen practical to reintroduce an earned income credit based,
as in the past, on the lower of these two net incomes. Darned adjusted
gross income would seem to be. the simplest basis for determining a tax
credit from both the viewpoints of ease of taxpayer compliance and
administrative simplicity, 2/ This procedure has the disadvantage, how­
ever, of allowing some taxpayers with large earned incomes but small net
incomes (owing to large allowable deductions) to pay little or no tax
in some years. Since these cases would involve taxpayers who itemize
their deductions and compute their net incomes, it might be feasible to
limit an earned income credit to a specified percentage of the taxliability where the net income is less than a stipulated percentage of
the earned adjusted gross income* limitations of this type,- however,tend to be cumbersome and. add not only to the income tax complexities
of the affected taxpayers but also to the administrative burden involved
in checking the returns of taxpayers who should have voluntarily observed
the limitation but didn* t •

!7 Senate Report' ho. 393» op* clt*, p, 2 3 *
2/ ’ See p. 9, above*.

ax tables mid tax forms ■

1»

Tax -tab les

A presumption that the first $5>000 of incone from any source is
earned would permit the earned income credit to be incorporated' into the
Supplement T tax tables labile this would produce the simplest^procedures
for both the mass of taxpayers using the tax table and the administrators,
it would fail to differentiate in any way between earned and unearned
incomes -below this level and it would add substantially to the revenue
cost of the credit, l/
■
. In the absence' of such $5,000 presumption, the present procedures
would be. complicated for millions of taxpayers using the tax table on
Form loHo as well as the taxpayers using the long-Forn iOHO. Thus,^
under the two illustrative methods discussed above, 2j taxpayers using
the tax table would be required to follow the procedures described'
below compared with merely finding their tax liability in the tax
table by reference to their;adjusted gross incomes and number of
exemptions a Since wages subject to withholding would represent earned income, all
withholding tables could oe recomputed to reflect the earned .income
credit without change in the size or nature of the tables. The percent­
age method would have to be revised, however, and night become either
somewhat less precise or more cumbersome.
.
2.

Tax' forms'

Under the 2-percent-tax-credit method, 3/ the taxpayer using'
Form lOHO would first determine his tentative tax either from the tax
table or b y ;computation as-under present procedures. IText he would
determine his earn'ed adjusted gross income and compute 2 percent ox
this amount» Finally, he would deduct the 2—percent credit iron
his tentative tax liability to find his final tax liability.
Under, the 10—percent— deduction method, 1/ the taxpayer using Form lOHO
would reduce iiis adjusted gross income by 10 percent of his earned adjusted
gross income- and then, on the basis of this smaller income, proceed to

1 / See pp, 3, 12 and 13, above.
See p c 9*

2/

Assuming no presum ption th a t th e f i r s t $ 5 ,0 0 0 .o f income, from whatever
source d eriv ed , i s earned*

27
fin d h is ta x in the ta x ta b le l / or by
p ro ced u res.
To implement e ith e r o f th ese methods f o r «adm inistrative pu rposes,
Porn lOHO.and th e in s tr u c tio n s would need to he re v is e d and expanded.
In general, th e!: schedules, p ertain in g - to a n n u itie s and p e n sio n s, p r o f it *
( o r ° lo s s ) from b u sin ess or p r o fe s s io n , and income from p a rtn e rsn ip s :
.would have to be re v is e d to p erm it th e s e g re g a tio n .of -the earned ,
p o rtio n s o f su ch.incom es. -In a d d itio n , p ro v isio n would need to be *
made f o r th e ag g reg atio n of a l l earned income from the s e v e ra l p o s s ib le ,
s o u rc e s , and f o r e it h e r th e computation o f the ta x c r e d it o r .tn e reduc­
tio n o f income, depending on th e p r e c is e -n a tu r e o f th e ta x c r e d i t .
As a lre a d y in d ic a te d , a presum ption th a t the fir s t^ $ 5 ,0 Q 0 pi income,
from whatever source d eriv ed , i s earned would perm it tne m il..io n s o r
taxp ay ers who use th e ta x ta b le on Form 10U0 to proceed a f r e e t 1 / 0 , t e
ta x ta b le as under p re s e n t p ro c e d u re s , s in c e , f o r then,, th e ta x c r e d it
.could be in co rp o ra ted in to th e ta x ta b le «
For th e more than 20 m illio n taxpayers u sing th e W ithholding
...
Statem ent (Form *1-2) as a f i n a l r e tu r n , i t would be d e s ir a b le to in tro d u ce
a sm all earned income presum ption 2 / in th e i n t e r e s t of s im p lic ity a n a d m in is tra tiv e convenience«, Under p re se n t p ro ced u res, suen taxpayers
,
■ nav in clu d e in th e Form ¥ - 2 re tu rn ( i n a d d itio n to wages, s u b je c t to with­
hold in g) n o t more than $1-00 of income from d ivid end s, i n t e r e s t , and
wages not s u b je c t to w ith h old in g. I f i t were presumed th a t a l l Of. suen
income i s earned, a sm all amount of i n t e r e s t and dividends vou. ^ e
tr e a te d as earned. The maximum ta x value o f t h is presum ption would be
about $ 2 , under p re sen t ta x r a t e s , in th e extreme ca se th a t tn e e n t ir e
$100 is.; d erived from i n t e r e s t and dividends * . T his *?1Q0 presum ption
would perm it th e continu ance of th e p re s e n t s im p lifie d procedures fo,r
both th e taxpayers - and th e .-c o lle c to r s o f in t e r n a l revenue, In the
17 I t should be noted th a t a taxpayer u sing the -tax taole- under t h is
~
^etiw-d would o b ta in a standard deduction of about lOg of th e sm a ller
income r a th e r than 1C$ of- the la r g e r a d ju sted g ross income as under
p re s e n t p ro ced u res. I f . t h i s were co n sid ered in e q u ita b le treatm ent
r e l a t i v e to -taxpayers not. u sing th e ta x ta b le but c la m in g th e
$500 standard ded u ction, an adjustm ent could ;be m d e by allo w in g
th ose using the ta x ta b le to deduct about li>> o f tn .e ir earned^
a d ju s te d g ross income«, '
. i >
. ' - '
.
2 / Assuming no presum ption th a t th e f i r s t $ 5 ,0 0 0 of income, from whateve
source d eriv ed , i s earned. Such a. g en era l presum ption woula a ls o
p erm it th e continu ance o f th e p re se n t s im p lifie d .p ro c e d u re s f o r th ese
ta x p a y e rs.

23
~ 2g

absence of this presumption* there is.a question whether taxpayers with
any income other t h a n ,wages-,subject 'to" withholding could be accommodated
on this simplified return form because :of the extreme limitation of
space .available.to make the required distinction between earned and
unearned income and of the‘additional administrative ..cost of making
separate computations where, unearned income appears compared with
finding'the tax in the:tape table.

Treasury Department, Division of Tax Research

November

Tat)le 1
Maxinun.tax/saving resulting from the earned income credit and difference in tax on unearned
and banned income computed at the level where maximum earned income credit applies,
. .
•
1 9 2 ^ 1 9 4 3 1/
Married person - No dependents

pas-31 2 /
^193^39
19^3

$ 1 0 ,0 0 0 •
2 0 ,0 0 0
' 3 0 ,0 0 0

14,000
14,000

$ 5 ,0 0 0
5 ,0 0 0
5 ,0 0 0
3 ,0 0 0
3 ,0 0 0

’ $ 55

. . 206
U96

56

$

208
S19

1,979
853
4, 14b

5 165.
bl9
i ,4s 9
S09

4 ,0 8 0 4/

:
As a
:percentage of
Amount :
tax on
: unearned
: income .
ro
0
•

r Net i n c o m e f .Portion of
:
: Tax liability computed for
level- at
i net income
: Maximum ¿net income level at which
income :iwhich maximum ^presumed to be: earned {maximum earned income credit
jlyear iearned income*
earned,
I income
•_____applies, assuming-______
i -credit
{whether earned:c r e d it 2 / {A ll income i s : A l l income i s
•' * applies
veif o r not
•<
?•' unearned :
earned____

$ 43
200
490
44

' 24.4
24.8
5*2

66

1 .6

As a
percentage of
unearned
income
after tax
:

. 1.0
1 .7
•3
.7

Treasury Department^ Division of Tax Research

1f
2/
3/

%J

There was no provision for earned income credit for years prior to 1924 and for 1932“ 1933» arll after 19x3.*
Difference in tax computed with and without earned income credit.
,
Tax for 1929 was reduced by decreasing the normal tax rates one percentage point.
Tax liabilityfor 19^+3
unadjusted for transition to current payment basis.
Includes net Victory
tax.and.assumes that only one spouse has'income.

Difference in tax on unearned and earned income under present law 1/ in the United Kingdom, Canada
and Australia, computed at the level where maximum earned income credit applies
Married person ~ Ho dependents

*
i Hot income level
iat which maximum
i earned income
: credit applies.

• Tax liability computed for
Difference in tax
i net income level at which
:
. As a - :
As a
'maximum earned income credit
i percentage ; percentage of
*
applies, assuming
: Amount • of tax on : unearned income
:All income is iAll income is
: unearned •
after
.
î
unearned
:
earned
i income
i
tax

United Kingdom 2j
Assuming wife, has
,no earned income

$ 6 ,0 0 0

$ 2 ,271

Assuming wife 1 s
earned income is
that for which
maximum allow­
ance is given j5/

6 ,0 0 0

2,271

Canada

bj

Australia

< 3 0 ,0 0 0 ) 5 /

6/

1 6 ,2 0 0

2/

2,992

1,821

1 ,6 2 3

11,315

1 2 , 1+H3

Treasury Department, Division of Tax Research
footnotes on next page*

;$

-

8 ,1 7 8

1+50

19.8#

12« 1^

6H2*

22 e5

17*H

1 ,1 2 2

9*1

6*H

Blk

9*1

$

ii» 3

Tablo 2 - concluded
Difference in tax on unearned and earned incone under present law 1/ in the United Kingdom, Canada
and Australia, computed at the level where maximum earned income credit applies t

Footnotes^

1 / -British Finane© (No« 2) Act, 19^5 and finance Acts, I9 U 6 and 19 ^ 7 , applicable to the year 19 ^ 7~US;
Canadian Income War lax Act, as amended by Chapter 63 , Statutes of 19 ^ 7 ,,.applicable to 19*48 and '
subsequent years? memorandum ”Australian Income -Taxation,” J. U 0 Garsidd, Australian Government
If ado Commissioner, November 28, I 9 H 5 , and Australian Income. Tax Act (No« 31 ) of 19^6, applicable
to the year I 9 H 6-U 7 a
.

c3
O

2/ Pound converted at $H©00
,y
^ ■
3/ M a x 5 m el working, wife 1 s allowance is $UH0, which corresponds to wife* s income of $528 or more*
kj Assuming wife’s income from any source not in excess of $250» If wife’s income is above $250
but not above $ 750 , the married person1s exemption of $ 1 ,5 0 0 is reduced by the amount of wife’s income
in excess of $ 250 * If wife’s income oxceeds $750, she must file separately as a single person*
5] There is no income level at which the differential in favor of earned income is a. maximum. Thc:amount
of $ 3 0 ,0 0 0 is used in these computations because:it is tb-Oi'maximum amount generally assumed to be
earned in; computations of tax burdens prepared by the Canadian government. Ho differentiation
between earned, and unearned income is made for the first $1,800 of income®
6/ Found’ converted.at $ 3 *2U«
Jj No differentiation between earned and unearned income is made; for the first $ 6 bS of income®

;§mf|
Lr

Table 3

' V11 «Sfl HI
lllfRif

Comparison' of'tax value of earned income credit in. the United Kingdom for 19 ^7-^8* Canada for 19^48,
and Australia for 19^6-U7, for selected amounts of net income
Married person 1/ - No dependents

Difference between tax •
Difference in tax as a percentage of
on earned and tax on »
Tax on unearned income
,V Net
unearned income
income
Tax on unearned income * Unearned income after tax
before
•
»
personal
United:Canada1Aus tralia United: Canada Australia United*
United3
»
Canada:Australia
Kingdom:
:
exemption Kingdom:
Kingdom1Canada: Australia
Kingdoni*
♦
*1
$ 2*000

1
£
,

5 ,0 0 0
1 0 ,0 0 0
1 5 ,0 0 0
2 5 ,0 0 0

$

1*71 $
1,821
1+.271
7,296
114,296

$150

2,318

3W
1,570
*4,68*4

^ ,3 6 8

8 ,1 2 9

U 50

9,568

15,372

*450

78

798

$

375

*450

8

$102

128
328

355
7*40
. 811
81 U

$

528
928

31.8$

2 0 .6
10.5

6*2
3 .1

1 0 ,3 ^
16*0
1 *4.2
1 2 .1
9.7

2 9 .7^
2 2 .6
1 5 ,8
1 0 .0
5.3

9.$
1 1 .8
7.9
5.8
If-.2

6 *2$
3 .0

M

10.3
13*9

5*-°

1 1 .8

6 .0

8.5

Treasury Department, Division of Tax Research

1/

Assumes One spouse has all the income.

Note?.

Computations are based on rounded figures.

Sources:

For the United Kingdom, British Finance (No* 2) Act, 19^5, and Finance Acts, 19^6 and 19*47> for Canada,
Income War Tax Act, as amended by Chapter 6 3 , Statutes of 19*47; for Australia, Income Tax Act (No. 31)
of I9 H 6 .

32

T able 4

Comparison o f s u c c e s s iv e In crem en ts: o f a d ju ste d gross income b e fo re ta x and
a f t e r ta x under p re se n t law,. 1J and under two i l l u s t r a t i o n s o f an earned
income c r e d i t , f o r s p e c if ie d amounts o f a d ju ste d g ross income
■••• • • M arried person

2k> dependents

Zj

E a tio s

S u cce ssiv e increm ents o f
Adjusted \
gross
$
income
:
î
3/
Î
»
;

Tax

5

■«Adjusted
s gross
iincome
•after tax

Adjusted!
gross :
iicome
:

s ( 1 ) ~ ( 2)

Tax

•:

;
: Adjusted
: gross
: income
!after tax
: (U)-(5)

0
( 2)

0)

/*?\

VJJ

( 6)

(5 )

C4)

¿Increment
:Increment of :of income
!after tax
*
tax 10
Jincrement of ¿to increiment of
J
income
:
income
S
< 5)§<4)
f
i (6)7 (4)
z

(7 )

( 8)

?re sent lav

$

1,000
i, 5ca

2,000
3 ,ooo
5,000
10,000
15,000
25,000
35,000
50,000
75,000
100,000
150,000
200,000

$ 1,000
$

67
152
323
094
1,862
3 ^ 3%
7»695

1 2 ,8 5 4
2 1 ,3 7 5
37,tei

5 ^ ,S 9 1
9 2 ,7 0 1
1 3 1 , 02 b

$
l , 8b 8
2 ,6 7 7
'4,307
8 ,1 3 8
11,56 6
1 7 ,3 0 5
22, lb-7

28,625
.3 7 ,5 6 0
^ 5,109
5 7 ,2 9 9
68,976

500
500
1,000
2,000
5,000
5,000
10,000
10,000
15,000
25,000
25,000
50,000
50,000

d*

C-*
1+3V6
/ $
86
415
171
829
1,6 3 0
371
1,169
3 ,8 3 2
3 ,4 2 8
1 ,5 7 2
b , 26 i
. 5 ,7 3 9
4 ,8 4 2
5 ,1 5 9
8,522
6 ,4 7 9
1 6 , ob 6 . 8 ,9 5 5
1 7 ,4 7 1
• 7 ,5 3 0
3 7 ,8 1 0
12 ,19 0
3 8 ,3 2 3
11*677

$

1 3 .3 /’
17a
17 o l
1 8 .5
2 3 .4
3 1 *4
4 2 .6
51.06
5 6 ,3
6 4 .2
69.9
- 7 5 ,6
7606

86
8 2 ,9
8 2 .9
8 1 ,5
76 ,6
6806
5 7 .4
4 8 .4
4 3 .2
3 5 .8
30a
2b . 4
2 3 .4

Tax c:redit of 2 percent of earned adjusted gross income 4 /
$

1,000
1,500 $
2,000

3,000
5,000
10,000
1 5 ,0 0 0
2 5 ,0 0 0
3 5 ,000 50 ,0 0 0
75,ooo-

1 0 0 ,0 0 0
1 5 0 ,0 0 0
20 0 ,0 0 0

37
112
263
59 b
1,662
3 ,1 3 b
7,195

1 2 ,15 k
20,375
35,921
52,891

2 9 ,7 0 1
1 2 7 ,02 b

$. 1,000
.i,b6b - è

500
$
37
500
76
1 , 000 151
2 ,0 0 0
331
5,000 •
1,069
‘
>,000
iMz
1 .0 ,0 0 0
4,06l
1 0 ,0 0 0 : • •te959
1 5 ,0 0 0
8 ,2 2 2
39,080
'25 *,000
I 5 ,5 t e
^7,109 • 2 5 ,0 0 0 • 1 6 ,9 7 1
6 0 ,2 9 9
5 0 ,0 0 0
3 6 ,8 1 0
72,976 • 5 0 -,000
37,323
1,888
2 ,7 3 7
b ,b 07
8 ,3 3 8
1 1 ,8 6 6
1 7 ,8 0 5
2 2 ,8 b 7
2 9 ,6 2 5

$

464
425
8b9
1 ,6 7 0
3 ,9 3 2
3 ,52 s
5,939
5,042
6,779

49.6
54.8

9 ,4 5 5
8 ,0 3 0

6 2 .2
67 *9

13,190

73*6
74*6

1 2 ,6 7 7

continued, on next page

fo o tn o te s on next page«

15 a
15 a
1 6 .5
2 1 .4
2 9 .4
bo «6

9 2 .7 $
8 4 .9
8 4 .9
83 »5
7 8 .6
7 0 .6
5 9 .>+
5 0 .4
45.2

37a
32a
26 c4
2 5 .4

h

j ]

33
Table U - concluded
Comparison of successive increments of adjusted gross income before tax and
after tax under present lav/, 1/ and under two illustrations of an earned
income credit, for specified amounts of adjusted gross income
Married person 2 / - Ho dependents

Adjusted
gross
income

2/

Tax

Adjusted
%\
%
gross
i •;
i
income ^Adjusted t
after tax? gross
: Tax
(l)-(2 )
;income : : ;

‘Increment of
¡Adjusted ¡Increment of
*
income
; gross
t tax to ;
* after tax
i income ¡increment of
* to incre­
¡after tax¡
incpme
ment of

: A ) - ( 5> =

C5) - ( 4)

;

4

m m

(s)
(1)
(2 )
( )
( 5 ) n;
(6 )
(3 )
(7 )
Deduction of 10 percent of earned adjusted gross income from income H/
1,000
1 ,5 0 0
2,000
3,000
5,000
10,000
15,000
25,000
35,000
50,000
75,000
100,000
150,000
200,000

$

hi
11s
272

599

1 ,6 0 6
2 ,9 2 3
6 ,5 1 9
1 0 ,9 9 s
lS,i+25
3 2 ,^ 2 6
4 7 ,7 0 9
81,287
115,63!}-

$ .1 ,0 0 0
1 ,4 5 9
1,882
2,728
^,401
8 ,3 9 5
12,077
is .U s i
2^,002
31*575
42,574

52,291
68,713
8 ^ ,3 6 6

$

500
500
1,000
2,000
5,000
5*000
10,000
10,000
1 5 .0 0 0
2 5 ,0 0 0
2 5 ,0 0 0
5 0 ,0 0 0
5 0 ,0 0 0

$

kl
77
15V
328
1 ,0 0 6
1 ,3 1 s
3 ,5 9 6
4 ,4 7 9
7,427
lU,00 l
15,283
3 3 ,5 7 s
3 4 ,3 4 7

§

U59
H23
SkG
1 ,6 7 2
3 ,99^
3,682
,Uo
5,521
7,573
10,999
9,717
1 6 , U22
1 5 ,6 5 3

6 4

8 „2/^
15 .^
1 5 .4
lG 9k
20.1
2 bo4
3 6 ,0
4 9 .5
5 6 .0
6l.l
6 7 ,2
68.7

s i.s fi
SU .6
SU .6

8 3 .6
79*9
73*6
6U .0
55*2
50 .5'
^.0
38.9
3 2 .8
31-3

Treasury Department., Division of Tax Research
l/ Internal Revenue Code, as amended by the Revenue Act of 19^-5»
2/ Assumes one spouse has all the income.
1 / Tu computing tax under present law and under first illustration of an earned
income credit, net income is taken as nine-tenths of adjusted gross income
at all. income levels. For tax under second illustration, net income is
assumed to be nine-tenths of adjusted gross income after deduction of
10-percent earned income allowance.
~/ Assumes all adjusted gross income is earned and present lav/ rates and ex­
emptions apply. If all income is unearned, figures are same as under present
law, provided earned income credit contains no presumption.
I^ote:

Computations were made from unrounded figures and will not necessarily
agree with figures computed from the rounded amounts and percentages
shov/n.

, •JM

3^
/

‘"i •

•. ...,

'l,; Table.: 5-

Comparison of tax liability under present law 1 / t o t h / tax 'under two
trations*- of an earned income credit, for s p e c i f i e d amounts of adjusted
- - , .. ' '
gross income •
... ..

Married person S/. - lib dependents...

:Tax after allowing :
ifor earned income
Adjusted
I Present law ¿ r é d i t ’assuming-all: ^
gross income i
tax
nadjusted
ri-4,•*«+ an cpf-nijs
i
gross
1/
îincome is earned WJ :

( 1)

(6)

(It) •

(3)

m

to

Decrease in ta±
•S.As'a oercentAs a
:age of ad-:
fpe*centage :justed gross
present .»
*JOf
O f Present
» income after
■:law- tax:.. :present làw
:
’: ' tax

Tax credit of 2. percent of earned adjusted gross; income

1 ,0 0 0

Î

1,500-•
2 ,0 0 0

3 ,ooö

5,000.

1 0 ,0 0 0

15,000.
25,000;
35,000;

50,00Q
75,000;
100.000
150.000
200.000

30

37

67

4o

112

I 52
323
09 b

60
1:00

263
594
. 1,662
3, t o
7 ,1 9 5
. 1 2 ,1 5 4
.20,375

1,8 6 2
3, t o

7,695
12, 8^4
21,375
37,t o

.

5OO
'■ 7 OO

1.,‘odo
1 ,5 0 0
2 .0 0 0
3 .0 0 0

35,921

5 ^ ,8 9 1

52,891

9 2 ,7 0 1
1 3 1 ,0 2 4

127,024

200

. . 300

8 9 ,7 0 1

4',000

Deduction of -10 percent, of earned adjusted income fr 013 income

1,000

1,500
2,000

3.000
5.000
•

10,000

15.000
25.000
35.000

50,00.0
75.000
100,000

150.000
200.000

■ .
.;

67
152
323
694
■ 1,862
3 ,4 3 4

7,695
12,854
21,375
37, t o

$
'

4l

.
.

3806p
2b
34
2 2 .5 15*9
.:
¿I
94 * ' 13 v6..
13 c8
. ... , : '257
... . v
511 - i 4»9
:t o 1 ,1 7 6
15 »3

- •■ .

118 ;
272

■■ 599
1 ,6 06
2 ,9 2 3 -•
'6 ,5 1 9
10,998
.18,425
'3 2 , 4 2 6 "
4 7 ,7 0 9

54,8 9 1

92,701
131,024

.
’

81,287

1 1 5 ,6 3 4

Treasury Department, Division of Tax Hesearch

Footnotes on next page*

.
:

1,855
•

2 ,9 5 0
. 4 ,9 9 5

, ' 7,182 •
H , 4i 4

15,390

14„4
13 08

13*3
13, 1:
12*3
11« 7

1
gd/ 7
1 .op*

■r. a

0*0

35
Table 5 *“ concluded

Comparison o f ta x l i a b i l i t y under p re sen t law l / _wi«h
tr a t io n s o f an earned income c r e d it , fo r s p e c if ie d amounts of a d ju sted
g ross income
M arried person 2J — Ho dependents
¿footnotes

w

I n te r n a l Revenue Code, as amended "bv Revenue Acu o.
Assumes one spouse has a l l th e-in com e.
, ,.
_
In computing ta x under p re se n t lav; and under f i r s t i l l u s t r a t i o n o an
earned" income: c r e d i t , net in co m e'is taken as n in e -te n th s
a d ju ste d
g ro ss income a t a l l income le v e ls ’; For tax under second i l l u s t r a t i o n ,
n et income is-assum ed to be n in e -te n th s of a d ju ste d g ross income a ^ te r .
deduction of 10 -p e r c e n t earned income allo w an ce.
.
Assumes p re sen t law r a te s and exem ptions. I f a l l a d ju ste d gross income
i s unearned, ta x i s same as under p re sen t lav;, provided earned income
c r e d it co n ta in s no presum ption,
»

'Hotel

Computations were made from unrounded fig u r e s and w i l l not. neces­
s a r i l y agree w ith fig u r e s computed from the rounded amounts and
. p ercen tag es shown..

'r

«Bl

3b

Table 6

Comparison o f Wo illu s tr a tio n s ': of an earned income c r e d it w itn
p re sen t law, if f o r s p e c if ie d amounts of a d ju ste d
g ross income
M arried person; 2 / - Ho dependents
D ecrease in p resen t law ta x
under earned income c r e d it
Present
law
:Allow ta x
tax
: c r e d it o f 2

Adjusted

g ro ss
income

‘Allow deduction
‘ o f v10 p e rce n t
¿percent of
‘ of earned ad­
s earned- adj u s t ed g ross
: ju s te d g ross
income U/
Hncoif ‘

if

(2 )'...

(.1)
1 ,0 Q 0
1,100
1,200
;1 ,2 3 5 1/
1 ,2 5 0
1 ,2 5 s
1 ,3 0 0

jj

.

15
21
zh

25
32

2,000

Ub
6?
I 52

3 .0 0 0

323

U ,000

505 .
69 '4
852

l.UOO

1 ,5 0 0

5 .0 0 0
5 ,S00 S_y/
„8 ,0 0 0
1,3*3
1 ,S62
10,000
3 /Ü3 U
1 5 .0 0 0
2 5 .0 0 0
7 .6 9 5
1 2 ,351+
3 5 .0 0 0
5 0 .0 0 0
21,375
3 7 ,1+21
7 5 .0 0 0
5’
4,S9i
100,000
9 2 ,7 0 1
1 5 0 .0 0 0
I3 I,02 U
200.000

(6 ).

15.
21
2U

10.0$

25

26
2S
30

-b

Ho
60

so
100
116
160
200
300
500
700
1 ,0 0 0
1 ,5 0 0
2 ,0 0 0
3 ,0 0 0
k,0G0

‘ 1 5 ,3 9 0

3asury Department, Division of Tax Reseaicn

fo o tn o te s on next page,.

Amount ¿As percentage
( 4 ) ^ ( 3 ) : o f p resen t
I4./
: law ta x 5 /
t ( 5 ) - ( 2 ) it/

m

(3)

$.

In c r e a s e or de­
c re a s e ( - ) o f 10p e rce n t p lan over
2—p e rce n t plan

Table 6 — concluded

37

Comparison of two illustrations of an earned income credit with
present law, if for specified amounts of adjusted
./
- ■:■/;_ 1
gross income
'
Married person
footnotes .

2[ - Ko dependents

';

,

-

.

,

if

Internal Bevenue Cod e i a s amended by the Revenue Act of 19^-5*
Assumes one spouse has all the income,
In computing .tax under present law and under first illustration of
an earned income credit, net income is taken as nine-tenths of
adjusted gross income for all income levels, For tax under second
illustration, net. income Is assumed to be nine— tenths of adjusted
gross income after deduction of 10-percent earned income allowance,
bj, Assumes-all adjusted gross income is earned and present law' rates
and exemptions apply.
If all income is unearned, tax is same as
under present law and figures in these columns are all zero,, pro**
vided earned income credit contains no presumption,
^
¿/ 'Taxpayer at this level of income would be made nontaxable under
the earned income, credit and part; of the credit would be wasted.
Ü/ The exact breaking point where the earned Income credit under the
10-percent plan would be just sufficient to, eliminate .present law
tax is 91,234,57 of adjusted gross income before credit,
JU , ^ e exa°t breaking point where the earned income credit under the
2—percent plan would be just sufficient to eliminate present law tax
is $1,258.28.of adjusted gross.income. At this level the 2—percent
credit exceeds, the value of the 10—percent prédit by the maximum
percentage, 1 H .5 percent, of present law tax,
8/ The exact breaking point where difference between the two earned income
credits is .zero is $5»755«83 °f adjusted gross income before earned
income allowance. For this amount, each plan results in a tax reduction
of oll5*l2 'from present law, assuming all adjusted gross income is earned
2/
¿/

Fote:

Computations were made from, unrounded figures and will not necessarily
agree with fibres; computed from the rounded amounts and percentages
• shown. ..!
" - ~
» - • -, •
• ■
•
&

Table 7
Estimated number of taxable income recipients under present law, l/ their adjusted gross income
and total tax liability, and the number of taxable income recipients with earned adjusted
gross income and their earned adjusted gross income, 2/ distributed by net income classes,
assuming income payments ¿/of 8166 billion
(Humber of income recipients in thousands;.money amounts in millions)

*
Net income
classes
(in thousands)

t
to
r<~\
1

Humber of
¡Total adjusted:
t taxable
: , gross
r
* income
:
income
'recipients

Under $1 ..
1 - 2
2 - 3
3 4
4 - 5

6,352.3
2 0 ,1 3 ^ .9
l4,3 2 2 .0
4,655.5
1,333.2

Under 5

46,801.8

?

5 - io
10 - 25

25 - 50
50 - io o
100 - 250
250 - 500
500 - 1000
1000 and over
Over 5
Grand total

1 ,0 2 6 .9
4 7 0 .2
101*2
32.7
9 .-8
1.3
.4

.2
1,71*2.8
48,544.6

0

:
Earned adjusted
:
gross income
¡Ho. of tax-,
Percent
¡able income : Amount
[distribution
rrecipients

Total tax liability 4/

Amount

:Ratio of earned
¡adjusted gross
iincome to total
¡adjusted gross
:
income

. 4.6

14,295.6
4,624.2
1.314.9

$4,196.5
2 0 ,003*1
33,701.6
15,163.1
5,404.4

73.2/o
S3.0
S5«2
85.3
82.4

9 ,4 3 5 .0

55.5

46,165.3

S6,46s.6

83.6

2 3 4 .5
2 7 6 .2

1,071.5
426.6
91.2
29.3
8.7
1.2
.4
.2

64.8
4S.6
3 0 .S

335.1
387.7

7.8
11.0
8*4
7.0
5.4
1.9
1.4
1*6

5,460.5

4 9 7 .4

1,318.0
1 .0 7 4 .4
1 .4 3 5 .5
1.183.6
915.2
328.9

7 ,5 6 6 .3

44.5

1 ,6 2 9 .1

1 1 ,0 3 0 .2

4 7 .6

4 7 ,7 9 4 .4

90,306.0

76.7

$

5,733.7
33.746.0
39.570.1
17,770.3
6,558.2

103,378.3
8.421.9
7.546.6 *
3 .7 3 3 .9
2.389.7
1.548.7

24, 061.0

.

128,239.3

Treasury Department, Division of Tax Research

299.5
2.839.6
3,692.3
1.827.7
775.9

1 7 ,0 0 1 .3

1.8/
16.7

2 1 .7
1 0 .0

1Q0.0.
continued on next page

5 .8 3 2 .9
2 0 ,0 9 7 .7

3 ,666*5
1,447.0
776.2
374.2
78.6
22*3
12.9

32.5
24.2
15.8

6 .6
3.3

L

a W * iE

?> Table 7

* concluded

Estimated number of taxable income recip'iknts under p r e s e t law, 1/their adjusted gross income
and total ta& liability, and.^e^nuimber of taxable income recipients with earned adjusted
gross income and their earned'adjusted gross incomeV 2_/ distributed by net income classes,
.
“v
as surging income payments 3/ of $lb6 billion •

Footnotes ,._
"
•- :
*
v
Hotei Figures are rounded and-will not-‘
necessarily add _tp*;totals,
. . .
•*
:.*•••
if Internal Revenue Code, as anexided by. the Revenue Act of 19*45*
.,v .:
¿/ Earned income is defined as earned adjusted gross income from (a) all wages, apd.salaries (including the
income 'of self-employed professional individuals) and-(b) up to 20 percent of trade or business income. ••
Unrevised concept. See "Rational Income Supplement to Survey of-Current Business, July I9 H 7V
5/- ,Includes..normal tax, surtaSc, and alternative tax on net- long-term capital gainsv
S_ourc'ei

Office o f 1the Technical- Staff,.. Treasury Department,

Table 8
Estimated number of taxable income recipients with reduced taxes or made nontaxable and the amount of tax
decrease from present law, lj distributed by net income classes, under two methods of allowing
earned income 2 / credits, assuming income' payments 3 / of $166 billion
(Humber of income recipients in thousands; money amounts.in millions)
'

Ret income
classes
(in thousands)

> ,

j

Under $1
1 w -b v :

a

2 - 3
3“ - l+v 5^4 5
-v. .

Humber of taxable Income recipients

Tg x decrease under method of allowing

2% of earned adjusted
gross income as a
tax credit

»With reduced: ¡iade nontaxable under
:taxes under i method of allowing
i
the two i2 of earned ;
10$ of
■i methods of i adjusted
learned adlallowing
:gross income :justed gross
:
earned
:
as a
:.income as a
:
income
:
tax
:deduction
:
credits
: credit
:from income

5 .2 3 2 .9
20,097,7
14,295.6
4,624,2'

sso.s
'•
•

2 ,5 9 2 .6
SSb*3
Ì31+.1

.

834,1

2 ,4 7 2 .0
8 ^3 .u

Amount

$

IO73 of earned adjusted
gross income as a
deduction from income ,

Percent
'distribution

79.7
537.7

4,1$
27.9

6 6 0 .6

3 ^ .3

301*7
108.1

15.7
5.6

1,687.8

Amount

$

75.7
510.7

6 2 6 .8
•.295*5

]
Percent
‘distribution

3 .6$
24.4
3 0 .0

113.1

14.1
5.4

8 7 .7

1 ,6 2 1 .8

77 *5

5-7
3*S
1,5

1 3 5 .^
iug.6
86.8

6.5
7*2
4,2

.4

5 6 .0
3 2 .0
6.8
1.9
1.1

.3

.3

.1
*•
*

2 .7
1 .5

2 3 5 .7

12.3

469.6

2 2 ,5

4 ,2 7 9 .0 '
1 ,9 2 ^ 5
continued on next rage
Treasury Department, Division of Tax Research

1 0 0 .0

2 ,0 9 1 .4

1 0 0 ,0

3 1 ^ .9 ;

Under 5

.46.165.3

5'- io
10 - 25
25 - 50
50 - 100

1 ,0 7 1 ,5

100 - 250
250 - 500
5 0 0 — 1 ,0 0 0

426.6

9 1 -2
29 o3
6.7
1.2
«4

Over 5
G-rand total

-

Vi93.s

4,279.0

~
.

^ •
~
- ;
-

.2

1,000 a n d over.'

1 ,6 2 9 a
1+7 ,7 9 W

129.5

■-

‘Ì.U93.S

.

•t

’'

—" '
-

1 0 9 .2
7 3 .3
2 8 .9
1 5 .5 .
7*5
1.6
*4

5

.1
.1

Table 5 - concluded
Estimated number of taxable income recipients with reduced taxes or made nontaxable and the amount of tax
decrease from present law, 1 / distributed by net income classes, under two methods of allowing
earned.income 2] credits, assuming income payments 3/ of $166 billion

Footnotes
Rote: Figures are rounded and will not necessarily add to totals,
if Internal Revenue Code, as amended by the Revenue Act of I9 U5 . ■
2j Earned income is defined as earned adjusted gross income from (a) all wages and salaries (including th(
income of self-employed professional individuals) and (b) up to 20 percent of trade or business income,
3/ Unrevised concept* See ’’National Income Supplement to Survey of Current Business," July^ 19^+7’
**.

Less than .05 percent.

‘H Source*
*

Office of the Technical Staff, Treasury Department

CO
o

Tacile 9
Estimated number of taxable income recipients with reduced taxes or made nontaxable and the amount of tax
decrease from present lav/, 1J distributed by net income classes, under two methods of allowing earned
income credits modified by the presumption that the first 55»000 of any income is earned income, 2 /
assailing income payments 3 / of 5166 billion
(lumber of income recipients in thousan ds; money amounts in millions)
lumber of taxable income recipients

Bet income
classes
(in thousands)

Under $1
: 1 2
2 3
3 h

With reduced ;
Hade nontaxable under
taxes under :
presumption.method
;
i
of allowing
:
the two
presumption >2f> of earned* 10 ^ of earned*
methods, of
: adjusted *
adjusted
i
:gross income; gross income;
allowing
earned
:
as a
;
as a
i
income
;
tax
; deduction
i
credits
; credit
; from- income?
6,305.1

^ r;-

5

2 0 ,1 1 9 .'6
1 4 ,3 1 3 .4
• **,6 5 0 .3
1 ,3 3 0 .0

’
•'Under

5

1+6 ,7 XS. 5

5 ~
10
10 - . 25
25 50
50 loo
100 250
250 500
500 1 ,0 0 0
1 ,0 0 0 'and over

3 2 .2
9.6
1,3
3

2,597*9

888*0

135.0 ^ ,

9083
2377.1
8 *15,0
303*3
■ • -

U, 580*1

4,553.8

—
y
y
y
y

—
y
n.

y ’'
'y

1,728.2

“

gross income as a
deduction from income
•
:
*
Percent
Amount
;
distribution

Percent
Amount *
distribution
{
;

1003
6iU3
735*2

2 5 ,0
3 0 .0

■ 3 4 5 .7
.. 1 3 6 .7

iUa
5.6

2,010.9

8 8 ,1

1 ,9 3 2 .4

7 8 .8

1 3 5 .4
S0 o6
29*8
1 5 ,8

5*9
3*5
1.3
*7
.3
.i
*
*

1 6 7 ,9
16 Ù. 6

6 ,8
6 .7

89.3
. 57*1
32.3

3*6

105.7

6 U 6 .7
774.8
353.0
I3 O .7

1*6
3
*3
.

U. 6f>

i
;

28.3
33*9
15.5'
5*7.

$

7.6

’
-

10p of earned adjusted

gro s s income as a
tax.credit

2 7 1 .5

Grand total
4 ,580 .x
U s ,UU 6 c6
2,282,3
4,533.8
________ ____________________________________ continued on next page
Treasury Department, Division of Tax Research

•

CT\

.2

2/j of earned adjusted

r—l
i—
1

Over 5

i , H 9 »3
U 6 5 .5
99,7

959.2

T a x decrease; under presumption method of allowing

1 0 0 ,0

$

6 ,8
1*9
1,1

2 .3
1 .3
*3

.1

*

5 2 1 ,0

21 „2

2 ,4 5 3 .4

1 0 0 .0

Table 9 - concluded
Estimated number of taxable income recipients with reduced taxes or made nontaxable and the amount of tax
decrease from present law, l/ distributed by net income classes, under two methods of allowing earned
income credits modified by the presumption that the first
000 of any income is earned income, 2J
assuming income payments 3 / of $loo billion
Footnotes
Note: Figures are rounded and will- not necessarily add to totals.
l/ Internal Revenue Code, as amended by the Revenue Act of 19^5*
,
/. , ,.
..
2/ Earned income is defined as earned adjusted gross income from (a) all wages ana salaries Unclading t 0
income of self-employed professional individuals) and (b) up to 20 percent of trade or business income,
provided that the first $ 5 ,0 0 0 of adjusted gross income regardless of source shall be considered as

I

3/

earned adjusted gross income.
t
, roir?
Unrevised concept. See «National Income Supplement to Survey of Current Business,« July 19^7*

*

Less than .05 percent.

Source:

Office of the Technical Staff, Treasury Department.

CO

Jr..

TREASURY DEPARTMENT
Washington,
F O R RELEASE, MORNING- NEWSPAPERS,
Friday, November Ik, 194 ? ''
V

Press Service
'No . S- 531

The Secretary of the Treasury, by this public noticeinvites tenders for $1,100,000,000, or thereabouts,- of 91-day
Treasury bills, for cash and in exchange for Treasury bills
maturing November 2 0 , 19A7, to be issued,-on a discount basis
under competitive and non—competitive bidding as hereinafter
provided. The bills of this series will be dated November 20
19^ 7 , and ui!! mature, February 1 9 , 1 9 4 8 , when -the face amount"
will be payable without;.interest. They will be issued in bearer
fprm only and ,in denominations of $1,000, $5,000, $10 000
$100,000, $500,000, and $1,000,000 (maturity value). '
*
Tenders will be received at Federal Reserve Banks and
Branches up to the closing hour, two o ’clock p .m.v, •Eastern
Standard-time, Monday, November 17, 19^7. Tenders will not'
be received at the Treasury Department, Washington.'- Each-tender
must be for an.even multiple of $1,000, and in.the case of
competitive tenders the price offered must be expressed on the
basis of .100, with not more than three decimals, e. g. qq qpb
Fractions^may not be used. It is urged that tenders be made• *
on the printed forms and forwarded in the special envelopes
which will be supplied by Federal Reserve.Banks *or Branches on
.application therefor.
'
TenJefs vin be received without deposit Prom incorporated
banks and trust companies and from responsible and recognized
dealers- in investment securities. Tenders from others must be
accompanied by payment of 2 percent of the face amount of Treasury
.bills applied .for, unless the tenders, are accompanied by an
express guaranty of payment, by an incorporated bank or trust
..company.
.
.
after the closing hour, tenders will be opened
at the Federal Reserve Banks and Branches, following which public
announcement will be made by the Secretary of the Treasury of
the amount and price range of accepted bids. Those submitting
enders will be advised of the acceptance or rejection thereof,
ihe Secretary of the Treasury expressly reserves the ri^it to
accept or reject any or all tenders, in whole or in part, and
uis action in any such respect shall be final. Subject to
fes<frvati°ns, non-competitive tenders for $200,000 or less
ithout stated price from any one bidder will be accepted in
avera8e price (in three decimals) of accepted
vithe^ tii ^ bldSV Settlement for accepted tenders in accordance
itn the bids must be made or completed at the Federal Reserve
2°iface
- 1947,
ln of Treasury
or otllerbills
Mediately
available
unas or in a like
amount
maturing

2

November.-:*.2 0 ,.19 ^7 - Cash and "exchange tenders will receive equal
■•treatment. Cash adjustments will be made for differenGes
ibetwedn the par value of maturing bills' accepted.in exchange and
the issue price of the new. bills,\\
i . The' income derived from Treasury bills, '-Whether interest or
•gain .from the; sale or other disposition of the bills’, ■shall', hot
have -any', exemption, as•such, and loss from the sale or -other.'
disposition of Treasury bills shall hot.have' any .'special t;reatment, hS i'SUch, under the Internal Revenue., Code, Or laws "amendatory
or supplementary:, thereto.;, The bills shall be 'subject to estate,
inheritance, gift or other excise taxes, whether Federal "or _ ;
.State,.but .shall,' be exempt from all taxation now or hereafter
imposed’on?the principal or interest thereof by any State, Or .
any of the possessions of the United States, or b^ any,-local..- •
taxing..authority. For purposes of taxation ‘the amount' of ,dis<-.
count ;dt. which* Treasury bills are originally sold, by the- ■United
States shall he considered to be interest. Under‘Sections :¿¿2'- and
117 (a) .(1). of the Internal Revenue Code, as amended.-by Section
115 of the Revenue Act of 19 ^-1 , the amount,of -discount -at' which -'
bills issued hereunder are sold shall not be considered .toaccrue "until such bills shall be sold, redeemed*or otherwise
disposed of, and such bills are excluded from consideration as
capital assets. Accordingly, the owner of Treasury bills (other:
than life insurance companies) issued hereunder need 'include in '
his income tax return only the difference between the price paid
for such bills, whether on original issue -or on subsequent purchase, .and the amount actually.received either upon sale or
redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss,.
''i Treasury Department Circular No . 4 l8 , as amended, and this,
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the'circular'may be obtained
from any Federal Reserve,-Bank or. Branch. . ‘
1 ^ *- ^
oOo

3O
$
u
TREASURY DEPARTMENT
Washington

(The following address by Edward H. Foley, Jr.,
Assistant Secretary of the Treasury, before
the National Convention of the Young Democratic
Clubs of Anemica at the Music Hall Auditorium,
at Cleveland, Ohio, is scheduled for delivery
at 1 p.m., E.S.T.» Saturday, November 15, 19A7,
and is for release at that time. )

Most people in the United States think of the Treasury Department
almost entirely in terms of money and bonds and taxes. It may surprise
you when I say that upon becoming Assistant Secretary of the Treasury,
almost two years ago, I found that among my various responsibilities
was supervising the work of one of the world’s finest and largest law enforcement organizations.
The Treasury Department, has been in the law enforcement business
since 17S9. -at the present time, the Treasury enforcement agencies
consist of six separate and distinct groups of officers engaged in the
prevention, detection and suppression of crime.
They are the Customs
Service, the Coast Guard, the Bureau of Narcotics, the Alcohol Tax Unit
and the Intelligence Unit of the Bureau of Internal Revenue,and the
Secret Serviceo These units make up a coordinated enforcement army of
2,500 trained investigators, not including a total Coast Guard personnel
of nearly 2 0 ,0 0 0 officers and men«
It is an interesting fact that those who would defraud their
Government generally hold other laws in contempt.
So, by enforcing
the statutes over which we have jurisdiction, the Treasury agencies
have put many a dangerous criminal behind bars* In fact,, under peace-time conditions, our agents have regularly procured the evidence upon
which more than half of all prisoners committed to Federal prisons
have been convicted.
The question naturally arises in your minds as to why we have such
an elaborate and well-trained crime detection service in the Treasury
Department. It is an old saying that iiioney is the root of all evilo
Most crimes are committed, not from personal lust, but for money gain.
The Treasury Department is charged with collecting all of Uncle Sam’s
revenue, with writing his checks, and with managing his debt and the •
entire money supply of the country. It is the business of the Treasury
Law Enforcement agencies to detect frauds against the revenues,' against
checks, and against tie money« These agencies protect Uncle Sam’s
pocketbook and in doing it, they protect your own too*

S-532

34
-

2-

I should like first, to tell you of the complex and interesting
work performed by our six law enforcement agencies and then say something
of what I conceive to be the importance of this work to our country#
All Americans who travel outside the borders of the United States
have had an opportunity to observe the work of the Customs Service*
The Service itself was cheated by the Fifth Act of the First Congress,
approved by President Washington on July 31,' 1789*
Smuggling is one Of those things almost everyone thinks he could
do if he tried* Like writing or acting, it looks easy and appears to
pay well* The chances of detection seem slight» This sort of reasoning
is attractive — and deceptive* Actually, most 11would be" smugglers
áre caught before they really get started* Between them and their dream
fortunes stands an international army led by United States Customs
officers, and'including private detectives, under-cover operatives*
informers, and such bodies as jewelers’ protective agencies#
One of the most dramatic cases in recent months occurred at
San Francisco# Many of you will remember reading in the press that an
army Colonel failed to declare several large diamonds upon his arrival
in the United States from Japan# 'An investigation of this matter by
Customs agents led to the seizure of smuggled diamonds having a.value
of more than 4200 , 000 *
This discovery resulted in the Colonel’s return to Japan under guard
where he was court-martialed and sentenced to 15 years imprisonment. At
the trial, a Japanese Government witness testified that he delivered nine
thermos bottles of diamonds weighing 165 thousand karats to the Colonel.
The market value of these diamonds was about 453 > 000 ,000 *
Occasionally the Customs Service finds itself acting as an arm of
our foreign policy.
Recently Customs agents frustrated an attempt to
export illegally from New Orleans landing craft, radios and other
surplus army eouipment which was to have been used in fomenting a
revolution in a neighboring country*
Another law enforcement agency on my list is the Coast Guard* The
Coast Guard has so many different law enforcement functions that it is
difficult to catalog them all# It enforces all Federal laws on the high
seas* These laws range from rules for the safety of seamen and
passengers on merchant vessels to the protection of the Alaskan seal
herd againpt poachers*
Just as the Fifth Act of the First Congress provided for the
Customs Service, so the Ninth Act established the United States Lighthouse
Service# The Lighthouse Service was one of the beginnings of the m o d e m
Coast Guard* Another was the Revenue Gutter Service which was conceived
by Alexander Hamilton and established by Congress’in 1790# Its functions
as outlined by the relevant statute were to enforce the collection of
customs duties and tonnage taxes, and it ?ias al$o provided that its
officers should also be “deemed officers of the Customs".
So it is easy

35
- 3 to see why the service logically belonged in the Treasury Department#
There it was put and there it has remained ever since* except in time of
war* when it serves with the Navy,
Another important law enforcement duty of the Treasury Department
is that of safeguarding the integrity of our Government’s obligations
through the United States Secret Service* founded by President
Lincoln in 18 64 #
One of the major functions of the Secret Service is the suppression
of counterfeiting and the combatting of theft and forgery of Government
checks and bonds# These crimes present a serious problem to the Treasury
Department at the present time# Now* when the national income is
averaging around 4200 , 000 * 000*000 a year* when millions of citizens own
Government bonds* and when a great volume of checks is sent every month
by the Government to war veterans, pensioners, and creditors of the
Government, it is more important than ever that all possible steps be
taken to prevent taxpayers from suffering losses at the hands of thieves
and forgers. The Secret Service received for investigation in the last
fiscal year nearly 30,000 check cases and 12*000 bond cases. Over 70
percent of 'these difficult cases were solved#
Counterfeiting* too, is on the increase# In the first four months
of this fiscal year, the Secret Service has seized over #2,250,000 in
counterfeit American currency# Of this amount over |2,000,000 was seized
before it could be put into circulation# Part of this sum was uncovered
in France where two Secret Service agents in conjunction with the French
police seized a complete counterfeiting plant and arrested eleven men near
Marseilles#
The Secret Service is also charged with the protection of the
President of the United States and all members of his family* It is like­
wise responsible for the safety of visiting dignitaries while they are in
this country#
One of the most vicious of all criminals is the narcotics peddler,
and it was to combat this dreadful social evil that the Bureau of
Narcotics was formed, I am often asked why this seemingly unrelated
service is in the Treasury Department. The chief reason is that the
distribution of narcotics is controlled through the use of the taxing
power# Narcotic agents wage a constant war against illicit trade in opium,
morphine, cocaine* marihuana, and other habit—forming drugs#
While the Secret Service agent relies on shadowing to secure his
information* and the intelligence agents of the Bureau of Internal,
Revenue delve into books and records in conducting their investigations*
the narcotic agent often assumes the guise of an addict or a peddler and
associates with under-world characters. Their work is fraught with danger*
as the type of gangster found in narcotics rings will not hesitate to kill
a Federal officer if some slip exposes his identity while engaged in an
under-rcover operation#

- 4 R e ce n tly a n a r c o tic o f f i c e r , o p eratin g under co v er, was in v ite d by
a gang to go duck shooting# He excused h im se lf g r a c e fu lly from t h is
exp ed itio n and l a t e r s u c c in c tly exp lain ed h is r e lu c ta n c e by sa y in g , HX
f e l t I was s in g le d out to be the duck” .
One of the typical operations by agents against dope smugglers was
conducted last summer and has become known in the annals of the Department
as the ”Affray at Woodbine Check11« Woodbine Check is a drop in the
All—M e r i c an Irrigation Canal near Calexico, California, some 50 yards
north of the international boundary line«
This affair was the culmination of a month long under-cover operation
during which a narcotic agent worked his way into a gang of international
opium smugglers by representing himself to be a big buyer of narcotics.
He was equipped with a roll of bills made up to simulate 25 thousand
dollars, and he was apparently so attractive to the sellers of narcotics
that several competing brokers engaged in a contest for his business#
Finally on June 22 of this year, one of the gangs indicated it would
deliver 138 cans of opium to him at Woodbine Check« The flat terrain at
the spot made it impossible for fellow officers to take up advance
positions and afford protection to the narcotic agent«.
Since automobiles seldom visit the spot, only one car could be sent
in or the gangsters would be suspicious.» Hoviever, it was found possible
to send two Customs officers to a building several hundred feet from the
rendezvous, armed with rifles, and they afforded valuable support to
the Treasury force in the fight that followed® It was also decided to
conceal some men in. the car to be used by the under-cover agent# The
rear seat was removed and two Customs officers and one narcotic agent
were concealed under suitcases and blankets.
The agent who had conducted the negotiations with the smugglers met
three of than, heavily armed on the bank of the canal#
On the pretense that his money was in the trunk of the car, the
Treasury agent maneuvered the smugglers, one of whom had the opium in
a sack, to the back of the 'car and sig n a le d to the concealed officers®
They sprang out, the smugglers started shooting as they retreated,
and the battle was on# Other smugglers who had been concealed on the
canal bank beyond began firing with rifles.
The 'battle continued for
almost an hour and one smuggler and the sack of narcotics were captured#
Treasury officers obtained positive evidence that at least two of the
other gangsters died of their wounds after escaping into Mexican
territory» •
We turn now. to the Bureau of Internal Revenue® This Bureau includes
the Alcohol Tax Unit® The forerunners of the present Alcohol Tax Unit
were the excise men# They began operations in 1791 to enforce a law
which imposed taxes on disti 3.1 ed spirits«. In putting down the so-called
whisky-rebellionM in Western Pennsylvania, President Washington settled
once and for all the question of the authority of the Federal Government
to tax liquor©

3
- $ In their work of preventing violations of the Internal Revenue laws
relating to distilled spirits, wines, and malt liquors, the Alcohol Tax
Unit agents use the most modern methods* They, like the other Treasury
enforcement agencies, have two-way radio-equipped automobiles* .The
Coast Guard cooperates by furnishing aircraft for spotting liquor stills
in wooded areas* The Alcohol Tax Unit taps many sources of information
which enables them to locate illicit distilleries in our large cities, as
well as in mountain canyons and southern swamps*
During the last fiscal year, the agents of the Alcohol Tax Unit
seized over 6 ,0 0 0 stills and arrested almost 8,000 persons* The; physical
dangers which have cost the Alcohol Tax Unit over 200 lives in the past
30 years still exist.
But the most important job of the Bureau of Internal Revenue is
collecting the income tax* The Intelligence Unit, organized in 1919;
spearheads the drive against those who have sought to evade their share
of the Federal taxes levied to support the functions of our Government*
The vast majority of our citizens are honest and scrupulous in their
tax dealings with the Government* Yet, as a result of the high tax rates
prevailing in recent years and the extraordinary war'incomer levels in many
lines and many geographical areas, the temptation to "keep it all" has
proved to be too great for some individuals* A steady procession of cases
into the Federal courts is demonstrating that cheating on Federal taxes
does not pay*
During the almost three years that our concentrated post-war drive
has been on, additional assessments of taxes and penalties, over and
above the original tax involved, have totaled nearly |>4 , 000 , 000 ,000 *
This is truly a staggering sum*
A part of this total undoubtedly represents technical adjustments
rather than evidence of outright evasion* Nevertheless, the greater part
stems from our tax enforcement drive*
In addition, hundreds of millions of dollars have been paid
voluntarily •, We estimate that for every dollar expended irf our tax
enforcement effort, we have a return of more than &2 0 a
Part of the success of our enforcement drive can be attributed to the
splendid cooperation that we have had from banks and other money handling
agencies in reporting the circumstances of all currency transactions of an
unusual nature, either as to amount or as to denomination*
You may be interested in a specific case in which these reports have
played a prominent part* Outstanding is one involving a prominent
restaurant chain operator, now under a four-year prison sentence for tax
evasion* The Treasury’s investigation of the affairs of this company
originated with bank reports of large currency deposits* We are now
collecting several claims for additional taxes and. penalties in this case
in excess of ^6 , 000 , 000 *

I 38
-

6

-

W g all have a stake in the efficient, collection of every tax
properly due the Government.* As an aftermath of the war, we are faced
with relatively heavy Government expenditures for some years to come,
even after exercising the utmost economy* To the extent that one
citizen or one business is able to evade its proper share of the tax
burden to meet these expenditures, the deficiency must be made up by other
taxpayers,*
You may wonder what all of this has to do with you as Young Democrats*
As articulate and influential citizens, your first concern is good
Government* One of the founda.tions of good Government is honest and
fearless law enforcement.* President Truman and Secretary Snyder have
always stood for vigorous and effective law enforcement with equal
application to those in every walk of life*
In recent years we have become acutely aware of the menace that
Communism offers to our American way of life and the peace of the world.
Communism is the first, but not the only, evil that threatens the security
of our Nation from within* Crime is another such evil, and crime in
every form must be fought as vigorously as we know how. I can pledge you
that the Treasury Department will continue to play its full part in this
campaign*

OoO

39

TREASURY DEPARTMENT
Washington

FOR IMMEDIATE RELEASE,
Monday, November 17, 19 4 7

Press Service
No. S- 5 3 3

During the month of October, 1947, market trans- *
actions in direct and guaranteed securities of the
Government for Treasury investment and other accounts
resulted in net sales of $14,128,500, Secretary Snyder
announced today*

0O0

TREASURY DEPARTMENT
Washington

Press Service
No. S-534

FOR RELEASE, MORNING NEWSPAPERS
Tuesday, November 18, 1947.___

The Secretary of the Treasury announced last evening that
the tenders for $1 ,1 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 1 -day
Treasury bills to be dated November 20, 1947, and to mature
February 1 9 , 1948, which were offered November 14, 1947, were
opened at the Federal Reserve Banks on November 1 7 .
The details of this issue are as follows:
Total applied for * $1,538,029,000
Total accepted
- 1,102,399*000 (includes $43,534,000 entered
on a non-competitive basis and accepted
in full at the average price shown below)
Average price - 99*765 Equiv. rate of discount approx. 0.931$
per annum
Range of accepted competitive bids: '(Excepting three tenders
totaling $3 9 0 ,0 0 0 )
High * 99*787 Equiv. rate of discount approx. 0. 843$ per annum
Low - 99.763
"
"
"
"
" ■ 0. 938$ "
"
( 3 2 percent of the amount bid for at the low price was accepted)

Federal Reserve
District

Total
Applied for

Total
Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St, Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
3 ,1 6 5 , 0 0 0
1,401,375,000

$
2 ,8 2 9 , 0 0 0
1,003., 959 *000
7/647,000
2 ,6 8 0 , 0 0 0
6 ,0 2 5 , 0 0 0
3 ,2 3 0 , 0 0 0
2 7 .2 3 6 . 0 0 0

18,315,000
2 ,6 8 0 , 0 0 0
6 ,0 2 5 , 0 0 0
3 ,2 3 0 , 0 0 0

43.266.000
6 .1 5 2 . 0 0 0
3.395.000
12.438.000
1 1 .8 6 0 . 0 0 0
2 6 ,1 2 8 , 0 0 0
TOTAL

$ 1 , 53 8 , 029,000

,

6 152,000
3',395, 0 0 0
1 2 .3 3 8 . 0 0 0
1 1 ,8 0 0 , 0 0 0

15,108,000
$1 ,1 0 2 ,3 9 9 , 0 0 0

TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Wednesday, November 19, 19U?.

P ress S e rv ice
||| 5^.535

Secretary of the Treasury Snyder today announced the offering, through the
Federal Reserve Banks, of 1-1/8 percent Treasury Notes of Series, A-19U9* open on
an exchange basis, in authorized denominations, to holders of 7 /8 percent Treasury
Certificates of Indebtedness of Series L-19U7* maturing December 1, 19U7* in the
amount of $3*280,792,000, or 2 percent Treasury Bonds of 19U7, maturing December
15, 19i7* in the amount of $701,072,900. Exchanges will be made par for par in
the case of the maturing certificates, and at par With an adjustment of interest
as of December l£, 19U7* in the case of the maturing bonds.
The notes now offered will be dated December 1, 19U7* and Will bear interest
from that date at the rate of one and one-eighth percent per annum. As in the case
of the notes offered by the Treasury last September, interest on the notes now
offered will be paid with the principal at maturity on January 1, 19U9. The notes
will be issued in bearer form only, in denominations of $ 1 ,0 0 0 , $£, 0 0 0 , $ 1 0 ,0 0 0 ,
$100,000 and $ 1 ,0 0 0 ,0 0 0 .
v
Pursuant to 'the provisions of the Public Debt Act of I 9I4Y, as amended, in­
terest upon the notes now offered shall not have any exemption,(as such, under the
Internal Revenue Code, or laws amendatory or supplementary thereto. The full provi­
sions relating to taxability are set forth in the official circular released today.
Subscriptions will be received at the Federal Reserve Banks and Branches, and
at the Treasury Department, Washington, and should be accompanied by a like face
amount of the securities to bp. exchanged and, where maturing bonds in coupon formare presented, by payment of accrued interest on the new notes at the rate of
$0.1i3151 per $1,000, since in these cases interest is to be adjusted as of December
15, 19U7• Subject to the usual reservations, all subscriptions will be allotted in
full.
The subscription books Yri.ll close for the receipt of all subscriptions at the
close of business Friday, November 21.

S u b scrip tio n s addressed to a F e d e ra l Reserve Bank or Branch or to th e Treasury
Department, and p laced in th e m ail b e fo re midnight November 21, w i l l be consid ered
as having been en tered b e fo re th e c lo s e of the s u b s c r ip tio n books.
The t e x t of the official c ir c u la r foll©YTs:

UNITED STATES OF AMERICA
1-1/8 PERCENT TREASURY NOTES OF SERIES A-19U9

Dated and b e a rin g i n t e r e s t from December 1,

19U7

Due January 1, 19U9

19k7

TREASURY DEPARTMENT,
O f f ic e of the S e c r e ta r y ,
W ashington, November 1 9 , 19U7-

Department C irc u la r N o . .819
F i s c a l S e rv ic e
Bureau o f th e P u b lic Debt
I.

OFFERING OF NOTES

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, as amended, invites subspriptions.from the people of the United
States for notes of the United States, designated l-l/ 8 percent Treasury Notes of
Series A-19ii9, in exchange for 7/8 percent Treasury Certificates ©f Indebtedness of
Series L-19U7, maturing December 1, 19U7, or 2 percent Treasury Bonds of 19ii7,
maturing December.If?, 19ij7- Exchanges will be made par for par in the case ©f the
maturing certificates, and at par with an adjustment of interest as of December 13,
1 9bl, in the case ©f the maturing bonds.
II.

DESCRIPTION OF NOTES

1. The notes will be dated December 1, 19U7, and -7/111 bear interest from that
date at the rate of 1 -1 /8 percent per annum, payable with the principal at maturity
on Januarjr 1, 19U9. They will not be subject to call for redemption prior t®
maturity.
2. The income derived from the notes shall be subject to all taxes, now or
hereafter imposed under the Internal Revenue Code, or laws amendatory or supple­
mentary thereto. The notes shall be subject to estate, inheritance, gift or other
excise taxes, whether Federal or State, but shall be exempt from all taxation now
or hereafter Imposed on the principal or interest thereof by any State, or any ©f
the possessions of the United States, or by any local taxing authority.3. The notes will be acceptable to secure deposits of public moneys.
will not be acceptable in payment of taxes.

They

!u B e a rer n o tes T r ill be issu ed in denominations of $ 1 ,0 0 0 , $ 3 ,0 0 0 , $ 1 0 ,0 0 0 ,
$100,000 and $ 1 ,0 0 0 ,0 0 0 . The n otes Y /ill not be issu ed in r e g is t e r e d form .
3 . The n o tes w i l l be s u b je c t t© the g en era l r e g u la tio n s ©f th e Treasury
Department, now or -h e re a fte r p r e s c r ib e d , governing United S t a te s n o te s .
III.

SUBSCRIPTION AND ALLOTMENT

1. Subscriptions Trill be received at the Federal Reserve Banks and Branches
and at the Treasury Department, Washington. Banking institutions generally may
submit subscriptions for account of customers, but ©nly the Federal Reserve Banks
and the Treasury Department are authorized to act as official agencies.
2. The Secretary of the Treasury reserves the right to reject any subscripaon, in whole or in part, to allot less than the amount of notes applied for, and
o close the books as to any or all subscriptions at any time without noticej and
any action he may take in these respects shall be final. Subject .to these rese-rva?-ons, all subscriptions will be allotted in full. Allotment notices will be sent
°ut promptly upon allotment.

43
-

IV.

2

-

PAYMENT

1 . Payment f o r n o tes a llo t t e d hereunder must be made on or b e fo re December 1,
or on l a t e r a llo tm e n t. Payment o f the p r in c ip a l amount may be made only in
Treasury C e r t i f i c a t e s of Indebtedness o f S e r ie s L—19U7^ maturing December 1 , 1 9 h l ,
or in Treasury Bonds o f 1 9 h 7 , m aturing December 15>, 19U7* which v i l l i be accep ted a t
par and should accompany th e s u b s c r ip tio n . The f u l l y e a r Ts i n t e r e s t on th e c e r ­
t i f i c a t e s surrendered w i l l be paid to the s u b s c rib e r fo llo w in g accep tance o f the
c e r t i f i c a t e s . In the case o f .the m aturing bonds in coupon form , payment of accrued
in te r e s t on th e new n o tes from December 1 , 19U7 to December 15», 19U7 ($0.U315>1 per
$1,000) should be made when th e s u b s c rip tio n i s tend ered. In the ca se of maturing
re g iste re d bonds, the accrued i n t e r e s t w i l l be deducted from th e amount of th e
check which w i l l be issu ed in payment o f f i n a l i n t e r e s t on th e bonds su rrend ered.
F in al i n t e r e s t due December 1$ on bonds surrendered w i l l be p a id , in th e case of
coupon bonds, by payment of December 15>, 19U7 coupons, which should be detached by
holders b e fo re p r e s e n ta tio n of the bonds, and in th e case of r e g is te r e d bonds, by
checks drawn in accordance w ith th e assignm ents on the bonds su rrend ered.
19k 7 ,

V . ' ASSIGNMENT OF REGISTERED BONDS

|

'

1. T reasu ry Bonds o f 19U7 in r e g is te r e d form tendered in payment f o r notes'
offered hereunder should be assigned by th e r e g is te r e d payees or a ssig n e e s th e r e o f
to "The S e c re ta r y of th e T reasu ry f o r exchange f o r Treasury Notes of S e r ie s A-19U9
to be d e liv ere d to _____
" , in accordance with' th e g en era l re g u la tio n s o f the
Treasury Department governing assignm ents f o r t r a n s f e r or exchange, and th e r e a f t e r
should be p resen ted and surrendered w ith the s u b s c r ip tio n to a F e d e ra l Reserve Bank
or Branch or to th e Treasury Department, D iv isio n o f Loans and Currency, Washington,
D. C, The bonds must be d e liv e re d a t th e expense and r i s k of th e h o ld e r.
V I.

GENERAL PROVISIONS

•1. As f i s c a l agents of th e U n ited S t a t e s , F e d e ra l Reserve Banks are au th o r­
ized and requ ested to r e c e iv e s u b s c r ip tio n s , to make a llo tm e n ts on th e b a s is and up
to the amounts in d ic a te d by th e S e c r e ta r y ©f the T reasu ry to th e F e d e ra l Reserve
Banks of the r e s p e c tiv e D i s t r i c t s , to is s u e a llo tm en t n o t ic e s , to r e c e iv e payment
fo r notes a l l o t t e d , to make d e liv e r y of n otes on fu lL -p a id s u b s c rip tio n s a l l o t t e d ,
and they may is s u e in te rim r e c e ip ts pending d e liv e r y of t h e 'd e f i n i t i v e n o te s .
2. The S e c r e ta r y of th e T reasu ry may a t any tim e, or from time to tim e , p re­
scribe supplem ental or amendatory r u le s and re g u la tio n s governing the o f f e r in g ,
which m i l be communicated promptly to the F e d e ra l Reserve Banks.

JOHN t . SNYDER,
Secretary of the Treasury.

TREASURY DEPARTMENT
Yfashington

(The following address by Secretary Snyder
before the National Industrial Conference
Board at the Waldorf-Astoria Hotel,
New York City, is scheduled for delivery
at 9:00 P.M., E.S.T** Thursday Evening,
November 20, 1947, and is for release at
that time«)

World War II proved conclusively that no single nation, nor any
narrow group of nations, can be self-sufficient» Today, national
policies and programs which do not give full recognition to this fact,
cannot be sound in concept and effective in operation*
We in this country should realize now, as never before, that the
United States, with all its resources, with all the practical and
creative abilities of its people, cannot continue to grow and progress
satisfactorily by itself* American economy to a great degree depends upon
the economies of other countries* We could not long maintain our present
high standards without international economic stability*
This meeting of your Conference Board takes place at a time when the
people of the United States are approaching far-reaching decisions
affecting the economic and financial future of the nation*
In making these determinations, we are duly aware of the heavy
cost of government today» “Meeting the High Cost of Government“ is a
matter of grave moment to every individual American* But I believe that
a discussion on this subject could more appropriately be termed “Meeting
the High Cost of Civilization»“ For, in the face of present world
developments, meeting the high cost of government is nothing less than
defraying the cost of freedom and security and continued well-being*
I
particularly welcome the opportunity to appear before you to
discuss aspects of our financial and economic Situation in its relation
to present-day issues*
We are inextricably tied up with the fate of western Europe and
other nations of the world* We could not escape the results that
would follow world chaos* We know, particularly iron our war
experience, how interdependent nations are today* We witnessed wide
restrictions to our own productive capacity when at the beginning of
the last war, the United States was cut off from the supply of
strategic and critical materials from other parts of the world* We have
learned, too, both during and after the war, the imperative need other
nations have for American goods*

S-5 3 6

-

2-

War disrupted and destroyed many essential industrial areas of the
world economy, leaving many nations looking to us for goods and tools
and technical knowledge to repair the damages«
Although two years have passed since the war, the devastation
wrought was of such enormity that dangerous resultant conditions are yet
a long way from correction.
Weighing our responsibility and our ability to aid the re-establishment
of world economies, we should, in light of our experience, make a careful
inventory of those things which the world needs from us now as balanced
against the products which we need from other nations.
In many fields, M e r i c an industry would suffer materially i f we
could not obtain certain essential products or their constituent raw
materials from abroad.
Crude rubber, copper, bauxite, lead, manganese, and zinc are
examples of imports indispensable to us in the manufacture of a variety
of products.
Certain strategic items, such as industrial diamonds, asbestos,
cordage fibers, mica, graphite, quinine, and the like, are mainly
produced outside our own country. Without them, our civilian and military
needs would not be sufficiently met.
Coffee and sugar are Important examples of imports which affect
intimately the life of the average M e r i c an.
On the other side of the picture, foreign nations are in vital
need of M e r i c an goods. Countries torn by war need supplies to replace
capital goods destroyed and to provide foodstuffs which formerly they
largely grew themselves. Even Latin-Meric an countries, which like us
did not suffer any physical devastation at home, have been unable during
and since the war to obtain all essential materials.
The European situation is especially acute. Standards of living
have been critically reduced over a large part of Europe, and the hard
winter of last year did much to make the situation worse.
Food and fuel shortages are in evidence throughout Europe,
particularly so in France, Austria and Italy.
Re-establishment of productive capacities has been much slower than
expected.
Coal production, dependent mainly on England and Germany, has been
drastically retarded, and imports from non-European areas have been
required to meet the barest necessities.

b
Due to the inadequacy of foreign exchange, imports of other raw
materials have also had to be curtailed* The examples are numerous
and important* The lack of wool, cotton, and other fibers gives rise
to the general shortage of textiles — restricted steel availabilities
to shortages of rolling stock, vehicles, and equipment in general —
less than normal imports of timber to the slowing down of repairs and
new construction*
The speed and efficiency with which measures are taken to relieve
these conditions will be strongly reflected in our future international
trade relations*
European recovery, for example, would make an important contribution
to restoring international trade to private channels* And, it would in
tuin go a long way towards releasing trade from the discriminatory
government control which prevails in certain instances*
American business has suffered in times past from such practices
in the allocation of quotas, in the determination of exchange rates, and
in the more complex relationships of trade and exchange control* It has
been one of the principal objectives of our foreign economic policy in
the last 14- years to break down these barriers and to eliminate, as far
as possible, world trade disadvantages to American business and American
labor* European economic recovery is essential to this objective*
The European Recovery Program, which will shortly be
eration by the Congress, is based upon cooperative effort
participating countries and upon the United States making
such countries certain necessary commodities and services
cannot provide for themselves at this time*

under consid­
cf all
available to
which they

The conditions under which this foreign aid will be offered are that
the participating countries will make the most of their own resources and
will make the most effective use of aid from the United States*
Both the interim aid pro gram,. which provides for urgently needed
food and fuel during this coming winter, and the long range aid program,
which provides for tangible recovery, are conceived with a full reali­
zation of the fact that our own resources are not inexhaustible*
For all practical purposes, and within our means, we are committed
to taking an active part in the rehabilitation of the world because, it
is well to repeat, we recognize the inter-dependency of nations,
because we know that we cannot continue in our own prosperous state
while the rest of the world remains in puch an unsettled condition, and
because we are determined, to the fullest possible extent, to bring about
a stable world peace*
It would profit neither Europe nor the 7/orld if, in efforts to restore
international stability, we should lose our own stability* For, although
the United Stales is enjoying the greatest business activity in its history,
and although we are making amazing records in production, in employment,
in national income, and in business profits, we will be unable to continue
to help ourselves, much less needy countries abroad, if we do not keep our
own house In order* We must assure a financially strong government* We
must maintain our national fiscal integrity*

It is unfortunate that a great many people today overlook this
obligation. These people follow the line of least resistance by
advocating tax reduction without regard to sound fiscal prudence*
As Secretary of the Treasury, I must consistently and forcibly
advocate the policy of providing sufficient revenues to meet current
obligations and to permit steady liquidation of tie public debt*
The United States Treasury closed its last fiscal year with a
surplus for the first time in 17 years* Certainly during this present
period of prosperity, we should maintain a balanced budget with adequate
provision for debt reduction*
It is a sobering thought that although our public debt has been
materially reduced from its peak, it still remains at the staggering
figure of $ 258 , 000 , 000 , 000 .
The public debt of the United States is a contract between the govern­
ment and the people of this country. Government bonds are held by
Individuals, by insurance companies, by banks, by educational and charitable
foundations. We must not weaken public confidence in government obligations
by ignoring our debt at a time when we should reduce it.
I want to make it perfectly clear that I am not opposed to tax
reduction* I believe tax reduction feasible and proper after we have
met certain necessary prerequisite obligations, I am convinced, however,
that before deciding on tax reductions, the Congress should first consider
foreign aid within a balanced budget, second, adequate debt reduction,
and third, equitable tax revision* When these three necessary preliminary
steps have been taken, consideration of equitable tax reduction would be
in order*
The Treasury Department has placed before the appropriate
Congressional committees a detailed study of various tax issues.
I should like to mention here certain of those fields in which the
Treasury feels particular consideration is warranted in devising a
sensible postwar tax structure*
Over the years, the rapid expansion of the nation demanded a
comparable Increase of governmental services, which in turn made it
necessary to seek additional sources of tax revenue* Much of the existing
tax system was enacted during critical periods of depression and war, and
consequently, certain inequities have become imbedded in the tax structure*
For example, excise taxes should be revised, particularly those that
bear substantially on business costs, or that tend to by pyramided, or
are overly regressive in the process of shifting the tax on to consumers.
The corporate tax structure has a number of important areas for
consideration in addition to matters of rates*

- $ **

48

Careful thought should be given to the correction of the so-called
double taxation of dividends*.
Economic considerations must be given to problems of small business*
The role of Federal estate and gift taxes should be strengthened
by better integration of the estate tax with the gift tax, and of both
with the income tax*
Individual income tax should be revised to provide a method for
treating family income on a uniform basis in all states*
Postwar tax revision should also strive to make some contribution to
Federal—State tax coordination*
Substantial technical adjustments in the present law would go a long
way toward smoothing the relationship between taxpayer and Government,
providing equity, promoting simplicity for taxpayers, and easing
administration for the Government.
But I would call to your attention that in making many of the needed
tax adjustments to correct inequities, we will incur a substantial loss
of revenue. Until such time as we determine the extent of this net loss,
we should not be too hasty in using up our margin of surplus in a general
tax reduction that might make impossible these vitally necessary
adjustments.
The creation of a sound post-war tax system is a much more complex
matter than the arbitrary revision of rates*
In closing, I would like to summarize the elements of a fiscal and
tax policy calculated, in m y belief, to have the maximum salutary effect
upon our domestic economy at this stage, and upon the carrying out of
our obligations to promote world peace and recovery*
We must maintain revenues at a level adequate to finance our interim
relief and ultimate European Recovery Program commitments within the
framework of a budget, not only balanced but with a surplus devoted to
public debt reduction.
We must eliminate the inequities, inconsistencies, complexities,
and unproductive elements of present-day tax laws*
We can thus maintain a sound, prudent, fiscal position.
When we talk of the high cost of Government, we must remember all
these foregoing considerations*
But to arrive at the total cost of operating our Government, we must
add the other expenditures of Government, namely? maintaining national
defense to prevent World War III; provision for our veterans of all wars;
paying interest on our present debt, which was largely created by

~ 6 World War 11$ our present commitments for international finance which
grew out of events of World viiar II»tax refunds; social security commit­
ments! and the maintaining of all other departments of the Government*
The President earnestly endeavored to cut the budget last year*
His work was^so effective that the Congress found it impossible to
reduce materially his submitted estimate of necessary Government
expenditures*
Whether or not the expenditures of the Government can be greatly
reduced this coming year in the face of present world conditions is a
problem to which the President and his Administration have been and are
giving careful consideration and study*
But regardless of the outcome of this study, we must face the cold
fact that in this transition period, our costs of Government are
necessarily going to be high.
It will take the cooperation and forbearance of all our people and
^•dl elements of our naebional life to meet the challenge of maintaining
our obligations while striving always to reduce as rapidly as is prudent
the total cost of operating our government*

•0 O0-

TREASURY DEPARTMENT
Washington
FOR RELEASE., MORNING NEWSPAPERS,. Friday, November 21, 1947. f

'

Press. Service
f No. S-537

‘ The; Secretary of the Treasury, ;by this public noticey
invites; tenders for $1 ,2.0 0 ,0 0 0 ,0 0 0 ', or thereabouts, of 9 0 -day
Treasury bills, for cash and in exchange for. Treasury" bills
maturing November 28, 1947* to be issued on a discount basis
under competitive and non-competitive bidding as hereinafter
provided. The bills of this series will be dated November 28,
194-7, and will mature February 26, 1948, when the face amount
will'be payable without interest. They will be issued in
bearer form only, and in denominations of $1 ,0 0 0 , $5 ,0 0 0 ,
$1 0 ,0 0 0 , $1 0 0 ,0 0 0 , $500,00,0, and $1 ,0 0 0 , 0 0 0 (maturity value ) •
Tenders will be received at Federal Reserve Banks and
Branches up to the closing hour, two o'clock p.m., Eastern
Standard time, Monday, November 2,4, 1 9 4 7 . Tenders will not be
received at the Treasury: Department, Washington. Each tender
must be for an even multiple of $1,000, and in the case of
competitive tenders the price offered must be expressed on
the-basis of■100, with npt more than three decimals, e. g.,
99.925. Fractions may not be used. It is urged that tenders
be made on the printed forms and forwarded in the special
envelopes which will be supplied by Federal Reserve Banks or
Branches on application therefor.
Tenders will be received without deposit from incorporated
banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders from others must
be accompanied by payment of 2 percent of the face amount of
Treasury bills applied for, unless the tenders are accompanied
by an express guaranty of payment by ah incorporated bank or
trust -company.
7
Immediately•after the closing hour, tenders will be opened
at the Federal Reserve Banks and Branches, following which
public announcement will be made by the Secretary of the Treasury
of the amount and price range of accepted bids. Those submit­
ting tenders will be advised of the acceptance or rejection
thereof. The Secretary of the Treasury expressly reserves the
right to accept or reject any or all tenders, in whole or In part
and his action in any such respect shall be final. Subject to
these reservations, non-competitive tenders for $2 0 0 , 0 0 0 or less
without stated price, from any one bidder will be accepted in .-!
full at the average price (in three decimals) of accepted compe­
titive bids. Settlement for accepted tenders in accordance with
the bids must be made or completed at the Federal Reserve Bank
on November 2 8 , 19^7* in cash or other immediately available
funds or In a like face amount of Treasury bills maturing

2
Novembers ¿8, I;
9%7 r.Cash and exchange tenders wil-l. receive
equal treatment * Cash adjustments vili he made for differences
between the par value.of"maturing bills accepted, in exchange
and the issue price of the new bills.
■The income, derived'from Treasury bills, whether interest
or gain from the sale.or other disposition of the„bills, shall
not have any exemption,..as -such, and loss from the sale- :or
other disposition of Treasury bills shall not have.-any .special
treatment, as such, under the .Internal Revenue ..Còde, e r .laws
amendatory or supplementary ~e thereto. The bills shall be subject
to estate, inheritance, gift or other excise taxes, whether
Federal or State., but shall be exempt from all taxation, now
or hereafter imposed on the principal or interest thereof by
any State,, or any of the possessions of the United States, or
by any local taxing authority. For purposes of taxation-the
amo.unt of discount at which- Treasury bills are originally sold
by the United States shall be considered to be interest.. •Under
Sections 42 and 117 (a), (l) of the Internal Revenue Code, as
amended by Section 115; of the Revenue Act of 194-1,. the amount
of discount at which bills issued hereunder are sold shall hot
be considered to accrue until such bills shall be sold, redeemed
or otherwise disposed of, and such bills are.' excluded from
consideration as capital as sets . Accordingly , the owner of
Treasury bills (other than life insurance companies) issued,
hereunder need, include in his income tax return only the dif­
ference between the price paid for such bills,, whether on
original issue or on subsequent purchase, and the amount actually
received either upon sale or redemption at maturity during the
taxable year for which the return is made, as ordinary •gain
or loss..
Treasury Department Circular No, 4l8, as amended,:and
this notice, prescribe the terms of the Treasury bills and
govern the conditions of their issue. Copies of the circular
may be obtained from any Federal Reserve Bank or Branch.
oOo

51
TREASURY DEPARTMENT
Washington
FOR RELEASE, ÎIORNIKG NEWSPAPERS
Monday3 November 24» 194-7______

Press Service
No. S'-538

The total assets of national banks on October 6 of this year amounted to
186,000,000,000, it was announced today by Comptroller of the Currency Preston
Delano* The returns from the call covered 5*019 active banks in the United
States and possessions* The assets were $2,500,000,000 more than reported by
the 5,;018 active national banks on June 30, 1947, the date of the previous call,
and were more than {[¡>300 ,0 0 0 ,0 0 0 over the amount reported by the 5*014 active
banks as of September 30* 1946> the date of the corresponding call last year*
The deposits of national banks on October 6 , 1947 were nearly $80*000,000,000,
which was an increase of more than $2,000,000,000 since June 1947* but a decrease
of $150,000,000 since September 1946* Included in the current deposit figures are
demand deposits of individuals, partnerships, and corporations of $45*778,000,000,
which increased $1,027,000,000, or 2 percent, in the three month period, and
time deposits of individuals, partnerships, and corporations of $18 ,726 ,000 , 000 ,
which increased $169,000,000, or 1 percent. Deposits of the United States
Government of $1,617*000,000 were $749*000,000 more than in Junej deposits of
States and political subdivisions of $4*313,000,000 showed a decrease of
$244 *000 ,000 , or more than 5 percent, and deposits of banks of $8 ,153 *0 0 0 ,0 0 0
were $719*000,000, or nearly 10 percent, more than in June. Postal savings
deposits were $2,800*000, and certified and cashiers 1 checks were $1 ,124 , 000 ,000 *
Loans and discounts were $20*081,000,000 on October 6 , which was an increase
of $1,271,000,000, or nearly 7 percent, since June, and an increase of
$4*280,000,000, or 27 percent, since September last year*
The banks held obligations of the United States Government of
$39*622,000,000* an increase of $ 197 *000 ,000 , or one-half of one percènt, since
June, but a decrease of $ 5 *693 * 000 ,000 * or more than 12 percent, in the year.
Obligations of States and political subdivisions held in October amounted to
$3*050,000,000, an increase of $149*000,000 over the June figure, and other
securities held were $2,137,000,000, an increase of $85*000*000*
Cash of $1,039*000,000, balances with other banks (including cash.items in
process of collection) of $7,922,000,000, and reserves with Federal Reserve banks
of $11 ,256 ,000 ,000 , a total of $20,217,000,000, increased $821,000,000 since
June 30 *
The unimpaired capital stock of the banks on October 6 , 1947 was
$1*775,000,000, i n d u c i n g $27,000,000 of preferred stock. Surplus 'was
$2,342,000,000, undivided pro-its $964*000,000, and reserves $340*000,000* Total
capital accounts of $ 5,421 ,0 0 0 ,0 0 0 were d l 2 ,000 ,000 , or 2 percent, more than at
tie end of June, and *290,000,000,. or nearly 6 percent, more than in September
last year.
The percentage of loans and discounts to total deposits on October 6 , 1947
was 25*19 percent, in comparison with 24*30 percent on June 30, 1947, and
19*78 percent on September 3 0 , 1946.•

Statement showing comparison of principal items of assets and liabilities of active national banks
as of October 6, 1947, June 3 0 , 1947, and September 30, 1946
(in thousands of dollars)

.

Oct. 6,

1947
Fumber of banks»................... .. 0.«
5 *019
ASSETS
Loans on real estate............... * *) $20 081,Q46
Other loans, including overdrafts....»)
20,081,046
Total loans...... ........ .......
U* S. O-overnment securities:
Direct obligations........... »....) 3 0 ^ 2 2 ,2 6 7
Obligations fully guaranteed..... .)
Total U. S. securities..... .
Obligations of States and political
subdivisions............ 1 .»........ .
Other bonds, notes, and debentures....
Corporate stocks, including stocks
of Federal Reserve banks.... .......
Total securities.... .
Total loans.and securities..... .
Currency and coin..... ...... ...... .
Reserve with Federal Reserve Banks....
Balances with other banks....... .
Total cash, balances with other
banks, including reserve.
balances and cash items in process
of collection»..».................
Other assets.... ....................
Total assets.... .......... .......

. June 3 0 ,
:
1947
5,018

SePt. 30»
• 1946
5.014

Increase or decrease :Increase or decrease
;since June 30, 1547 :since Sept. 30,1946
; Amount
•.Percent
1 Amount
:Percent
.10
1
.0 2
5

( $4,228,135) $15,801,498
( XU,581,871)
18,810,00b 18,801,498
( 39,419,227) ^5»315*509
i
6 ,378 )

6 .7 6 $4 ,2 79,548

2 7 .0 8

6,76

4,279,548

2 7 .0 8

1 0 6 ,6 6 2

.5 0 -5,693*242

-12.56

•50 -5,693,242

-12.56

$1,271*040
i, 27 i,o 4o

39*622,267

3 9 .4 2 5 ,6 0 5

45,315»509

196 ,6 6 2

3*050*027
1,981,623

2,900,981
1,896,733

,2 ,6 7 0 ,1 0 3
1,971,201+

i49,o 46
84,890

5.14
4.48

379*924
10,419

6i4

.4o

2,504

155*952
44,809,869
64,890,915
1,038,572
11,256,403
7*921,634

2 0 52 l6 ,6 0 9
879*852
88,987» 376

153. W
155*338
44,378,b57 50,110,264
6 3 ,1 8 8 ,6 6 3 ""6 5 ,9 1 1 ,76iT
957,986“
9 8 8 ,2 8 8
10,623,726 1 0 ,4 9 6 ,6 5 2
7,455,805
7,783» 534

19.395,54$.
829,049
8 3 ,^13,2 6 0

" 431 ,2 1 2
1 ,7 02,252
50,284

632,677
138,100

18,910,443
8 2 1 ,0 6 1
""835,6o6
5.0,803
85,657,811 ' 2 ,574 ,lit

.9 7 - 5 ,300,395
2 .6 9 - 1 ,0 2 0 ,8 4 7 '
5 .0 9
8 0 ,586 “
5*96
7 59,751
1,77

4,23

6,13
3 .0 9

465,829

1 ,306,166
447246 ”
329,565

l4 . 23
*53

1 .6 3
- 10 .5 2 .
-1.55
8.4l
7.24

6 .2 5

6 .9 1
5.30 '
. 32

p -

cn

Comparison of* principal items of* assets and liabilities of* national banks — continued
(In thousands of dollars)

;

'

' *.
I

O ct. 6 ,

June 3 0 ♦
; 1-Ä7

LIABILITIES
D ep o sits o f in d iv id u a ls ,, p a rtn e r­
ship s and c o rp o ra tio n s :
Demand.. . . . . . . . . . . . . . . . . . . . . . . . . . .
$1+5,778, 32 ++
$HH,7 5 i , o i o
18 >.556 ^6o6
T im e.. . . .--.A.v.-.v.-. . v . . . . . •. #•......
1 8 ,7 2 5 ,6 9 7
Po s t a l savings d e p o s its .. ■ . . . . . . . . . .
.. 2»60H
2 ,7 9 3
D ep o sits o f U. S* G o v e r n m e n t......-..'.
868 ,.0 H9
i , 6 l 7 , !+SO
D ep o sits o f S t a te s and p o l i t i c a l
s u b d iv is io n s ......................................... ..
9 , 562,716
8 , 1 5 3 , 1^4
D ep o sits o f banks. . . . . . * . A . . . * . . * « * . - * . .
7 , 1+33,963
O ther d e p o sits ( c e r t if ie d .a n d
...........
c a s h i e r s 1 ch eck s, e t c . ) ..........................
1 , 12 H, 122 , 1 , 222,001
T o ta l d e p o s i t s . . . . . . ............ .............
7 9 .7 2 0 .0 W ~
7 7 , 397, 1p
B i l l s p a y a b le , re d is c o u n ts , and o th er
l i a b i l i t i e s f o r borro\jed m o n e y .....
27,860
11+3,835
O ther l i a b i l i t i e s . . . . . . . ............................
702,1*65
6 79 ,5 71
T o ta l l i a b i l i t i e s , exclu d in g
c a p it a l acco u n ts............ .................... ..
80,56,6', gHH
7 8 ,1 0 ^ ,5 S 0
CAPITAL ACCOUNTS
C a p ita l sto c k :
P re fe rre d s to c k * . . . . . . . . . . . . . . . . . . .
27,0 10
2 8 ,3 5 9
Common sto ck .
1 .7W .U 53
1,71+2,512
T o ta l,
1,775,1+63
i f 7 7 0 ,8 7 1
S u r p l u s . ........................................
2 . 329,951
2 ,3 ^ 1 ,7 3 7
963,589
Undivided p r o f i t s * . . . . . . . . . . . . . . . . . . .
S7U.79S
He se rv e s.
333,060
3 ^ 0 , 2U3
T ot a l surplu s , pro f i t s and.
r e s e r v e s ,. , , , , , ,
7 , 5115,569
3 ,5 3 7 ,8 0 9
T o ta l c a p i t a l a c c o u n ts .. . . . . . . . .
5,1+21,073
5 ,3 0 8 ,6 8 0
T o ta l l i a b i l i t i e s and c a p it a l
acco u n ts. ...............................................
8 5 .9 8 7 ,7 7 6
8 3 , Hi 3.260
R a tio o f lo an s to t o t a l d e p o s i t s * . .. .
24* 30 1»
2 5 .1 9 ? ~
NOTE:

*, Sept* 30,
; 19 H6

: In cre a se 01 d ecrease : In cre a se or decrease
: sin ce June 30, l S p
: sin ce Sept* 30,19^6
: Amount
: P ercen t
Amount : P ercen t

$HH,-320 , 2HH
1 7 ,7 i C,'57H
2-,787
5 > 0 7 3 >626

¡ n , 02 ? , 31 ;169,091
-ll
71+9 , p i

3 ,9 7 0 ",025
7 , 712,905

- 2'+-+,232
7 i9 ,i8 i

- 5 .3 5
9.-67

379,1+59
1*1+0,239

9 .6 3
5 .7 1

1,102,1+73
7 9 , 869 , 631+

- 9 7 ,8 7 9
2 ,3 2 2 ,8 9 5

- 8 .0 1
3.0 0

2i,6H 9
- 149,590

1*96
- .1 9

■ +5,227
611,622

1 15,975
22,89*4

H1 6 .28
3 .37

2.30 $ 1 , 1+58,080
3*2 9
5.68
1,007 ¿123
.9 1
6
.22
-*■ 39
86 / 3 H - 3 , 1+56 , 11+6 - 68.12

80 , 526,483

2 ,H6 i , 76 H

3 ,1 5

l+l+,6l2
1 ,7 0 3 ,9 7 6
1 ,7 4 8 ,5 6 8
2 , 176,630
883 , 23 g
322 ,£72

- 'l , 3 1+9
5,91+1
!+,592

- 1+.76
.71+
•26
.5 1
10o l5
2,16

11,786

88,791
7 ,1 8 3

98,608 218,03
90 , 8lp> lH .85
39,861

.0 5

- 17,6 0 2 - 39 .H 6'
2.6 1
1+1+.1+77
2 6 ,8 7 5
I . 5H ''
165,107
7*59
9*10
80 ,351
5 ,3 8
1 7 ,3 7 1

3,382,71+0
5 ,1 3 1 ,3 2 8

107,760

3# 05

262,829

112,352

2,12

289 , 70H

7 .7 7
5.65

85 ,6 5 7 ,8 1 1

2 » 5 7 H ,ll6

3 .0 9

729,565

,3 8

, 19.781*

Minus sign d enotes d ecrease*
- 3 ~

Ol

GO

TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS
Tuesday, November 25, 19^7»

Press Service
No. S-539

The Secretary of the Treasury announced last evening that
the tenders for $1 ,2 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 0 -day
Treasury bills to be dated November 28, 1947, and to mature
February 26, 1948, which were offered November 21, 1947, were
opened at the Federal Reserve Banks on November '24.
The details of this issue are as follows:
Total applied for - $1,606,910,000
Total accepted
- 1,202,745*000 (includes $38,460,000 entered
on a non-competitive basis and accepted
in full at the average price shown' below)
Average price - 99*765 Equiv. rate of discount approx, 0.940#
per annum
Range of accepted competitive bids:
High i 9 9 . 7 8 0 Equiv. rate of discount 0.880# per annum
Low - 9 9 . 7 6 4 '"
”
"
. "
0.944# "
”
(85 percent of the amount bid for at the low price was accepted)

Federal Reserve
District

Total
Applied for

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta ..
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
1 ,8 1 0 , 0 0 0
■1,504,928,000
1 8 ,6 1 0 , 0 0 0
1 ,7 5 0 , 0 0 0
2.995.000
2 .0 7 5 . 0 0 0
40.041.000
4.025.000
3.435.000
7.644.000
9 .1 8 7 . 0 0 0
10.410.000

$

$1 ,6 0 6 ,9 1 0 , 0 0 0

$1,202,745,000

TOTAL

Total
Accepted
980,000
1 ,1 5 0 ,6 7 8 , 0 0 0
1 ,9 1 0 , 0 0 0

1.450.000
2.495.000
1 .6 7 5 . 0 0 0
1 6 v41 6 , 0 0 0
4.025.000
3,135,00Q
7.569.000
8 .6 0 2 . 0 0 0
3 ,8 1 0 , 0 0 0

TREASURY DEPARTMENT
Washington
Statement by Secretary Snyder on Inflation Control,
before the House Banking and Currency Committee.
November 25, 19^7
Mr.^Chairman and Members of the Committee: I appreciate
your invitation to appear before this Committee to discuss
certain phases of the program for the control of inflation
outlined in the President's message of November 1 7 ,
It is of the utmost importance that we extend early aid to
the Western European countries in order to assure that people
will not go hungry and cold this winter and to assure their
continued participation as free nations in the world economy.
It is equally necessary that this aid be extended without sub­
jecting our economy to the strain of further inflation.
Both of.these things are essential if we wish to maintain
a national environment and a world environment in which peace
and freedom can continue to develop. ,I.f we fall short of our
goal in foreign aid, our own freedom could be threatened by
external forces ; and, if we fall short of our goal in controlling
inflation, we will be threatened by the danger of. economic
collapse at home. We must avoid both dangers .
I have been invited to appear before you this morning on
one phase of the anti-inflation program. As you know, testimony
in support of the emergency program for European assistance has
been presented by representatives of the Departments of State
Commerce and Agriculture.
The ^President outlined three types of measures for the con­
trol of inflation; one, measures to relieve monetary pressures;
two, measures to channel scarce goods into the mos't essential uses
and, three, measures to deal directly with specific high prices.
tIt is to the first of these measures that I will give at­
tention, ^as other representatives of the Administration have
been invited to discuss items two and three.
Anti-inflationary measures which may be taken in the monetar
tield are of course but a segment of the whole program, and could
not, by any means, solve the problem alone. But such steps as
can be taken when related to those in other fields will of course
be helpful in the overall solution,
fi +.J|The Pres^deil'
t is greatly disturbed in regard to price iniation, which threatens our whole economic structure, and he is
convinced that the Congress is equally concerned.
S-54o

The President ho,9 laid special emphasis on voluntary
actions on the. part of "businessmen, labor leaders, farmers,
and consumers to hold prices down. Intensified efforts will
be continued to obtain voluntary restraint... Certain powers
are necessary, however, to fortify the voluntary efforts.
The President has suggested that consideration be given to
the following monetary measures: one, that Consumer Credit
Controls should be restored; two, some restraint should be placed
on inflationary bank credit; three, Legislation should be pro­
vided to prevent excessive speculation on the Commodity Ex­
changes; four, intensified activity in the sale of savings bonds.
The last item is the only one of those suggested which comes
completely under the jurisdiction of the Treasury Department,
and I shall devote my time principally to a discussion of that
particular item. I shall touch but briefly upon the remaining
three as they are primarily the concern of other government
Departments' and are being discussed by representatives of those
Departments as they appear and testify.
Item one, "restoration of Consumer Credit Controls", will
be discussed by Federal Reserve officials. I am in favor of
the restoration of those controls.
The most effective types of credit control are those which
strike at the individual forms of credit extension which are
contributing to'inflationary pressures. The most important singl
form of such credit extension at the present time is in consumer
credit.
Total consumer credit outstanding at the end of September
reached an all-time peak of $11,400,000,000. At the end of
3*945* it amounted to only $6,600,000,000. Prior to December
1946, total consumer loans outstanding at any one time had never
reached the $1 0 ,0 0 0 ,0 0 0 , 0 0 0 level.
This increased use of consumer credit in the present
period of inflationary pressures can only add to those pressures.
As we all know, the curtailment of the production of consumer
goods during the war period gave rise to a tremendous deferred
demand for such goods. As we-all know, despite the fact that
industrial production during 1947 has reached the highest level
ever attained during peacetime, we have" not yet been able to.
produce enough goods to satisfy this deferred demand. There
still exist many important shortages of goods.. But with produc­
tion near capacity levels, purchasing power made available by
consumer loans can be used only to bid up prices of consumers 1
goods, not to purchase more goods. It is imperative, therefore,
that efforts be made to restrain the demand for scarce goods
until supply approaches demand.

Money market interest rates form a small part
cost of consumer credit, and changes in such rates
powerless to limit its extension. It is necessary
specifically by regulation such matters as minimum
and the maximum periods over which payments may be
installment purchases of consumers' goods in order
this type of inflationary credit.

of the total
are almost
to cover
down payments
spread on
to restrain

In reference to the matter listed under Item two, "some
restraint should be placed on inflationary bank credit”, this
is a matter under the jurisdiction of the Board of Governors of
the Federal Reserve System which has responsibility for overall
bank credit control. However, the Treasury Department, due to its
responsibility on debt management, has been actively studying
this field .for some time. Some of the Treasury activities in
this connection cover debt management, interest rate adjustments,
and study and recommendations regarding bank credit trends,
I must point out here, that the Treasury must continually
measure the effects of bank credit controls against the problems
of debt management. The management of the public debt since the
close of the war has presented a.continuing problem.
The public debt reached its peak of $280 billion on
February 28. 1946. During the following ten months, it was re­
duced over $20 billion, reflecting the reduction In the cash
balance in the Treasury from a wartime to a peacetime level.
Almost all of the reduction in the debt.during this period took
place in the holdings of Government securities by commercial
and Federal Reserve Banks. Since the end of 1946, the debt has
remained substantially constant, reflecting the approximate
balance of the budget during this period. Holdings of Federal
debt by commercial and Federal Reserve Banks have nevertheless
continued to be reduced and fell by over $6 billion in the first
ten months of the year, with holdings by nonbank investors
increasing correspondingly.
The concentration of debt reduction during 1946 on securities
held^by banks and the transfer of over $6 billion of debt thus
1947 from bank to nonbank hands have been, in large part,
the consequence of the public debt policies of the Treasury and
of the restrictive credit policies of the Federal Reserve Bystem.
These policies have contributed substantially to the fight
against inflation, and will be continued as long as they are
appropriate, I' should like to note in this connection that a \
sizable reduction in the public debt will be possible during the
early months of 1948 -- during which months will occur most of
the excess of Government receipts over Government expenditures
predicted for the entire fiscal year.
To minimize bank credit expansion, restrictive measures
have been applied to the money market by the Federal Reserve
system and the Treasury. This has been reflected by a rise in
interest rates and a better balance between short and long term
rates.
0

The average rate on 90 day Treasury hills has increased
from 3/8 of 1 percent in early July to nearly 1 percent at the
present time; while the rate on 1-year Treasury certificates of
indebtedness has risen from 7 / 8 of 1 percent to 1 -1 / 8 percent
in the same period. -During this time the yield on the longestterm Treasury bonds -- those issued in the Victory Loan -- has
risen from a little over 2 . 3 0 percent to about 2 . 4 3 percent.
The entire debt management policies of the Treasury since
February, 19^-6 have been of an anti-inflationary character.
First, there was the paying off of bank-held Government debt out
of excess cash balances; second, there has been a payment on
bank-heId debt out of funds derived from (a) budget surplus,
(b) trust funds, and (c) the sale of savings and investment bonds
to the public; third, pressure on the money market with slightly
higher interest rates. Through the payment and calling of
maturing bonds and refunding them into short term issues, it has
been possible to create an interest pressure on the money market
without an increase in the net cost of the market debt to the
Government.
In making our decisions with respect to public debt manage­
ment, we must constantly weigh the restrictive effect of any
proposed debt management actfbn against its cost in added
interest burden on the taxpayer. An increase of 1/2 of 1 per­
cent in the average cost of carrying the public debt, for
example, would mean an added burden of $1-1/4 billion a year on
the taxpayer.
At the present time, as you know, the interest cost on our
public debt amounts to more than $5 billion per annum. This is
a large ^figure and may increase in the .future if a larger
proportion of our debt is carried in longer-term securities
requiring higher coupon rates of interest. It is, therefore,
imperative that during these times of great prosperity we should
continue to collect adequate revenues over and above a balanced
budget to provide for a systematic reduction of the debt total.
A reduction in the debt through a substantial budget surplus is
the most anti-inflationary measure that can be taken in the
fiscal field.
In the field of commercial bank loan credits, the Treasury
Department, through the Comptroller of the Currency, has been
very active in studying trends and taking steps to induce a
restraint in inflationary bank loans.
.A few weeks ago, we had the District Chief National Bank
Examiners in for a conference, at which time the credit situation
was discussed at some length. The Chief Examiners were
instructed to have their examiners, during the course of examina­
tion of banks, counsel with and caution bankers against
speculative lending policies.

' -

j%|:

J;
V f •

| ;.f

’
f

%1

pttf ■' v-

I '.

:fl' •“

- / * S

\ ^ ' ; §|® • "§ f '

IS

'\\J \J \'

- 5 -

More recently, the Board of Governors of the Federal
Reserve System, the Comptroller of the Currency, the Federal
Deposit Insurance Corporation and the Executive Committee of
the National Association of Supervisors of State Banks have
collectively taken steps to urge the curtailment of all loans
either to individuals or businesses for speculation in real
estate, commodities, or securities. In a joint statement
issued this morning by these agencies all bankers are urged to
confine the current extension of bank credit to the greatest
extent possible under existing conditions to financing that
■will help production rather than increasing consumer demand.
Item three, Secretary Anderson of the Department of
Agriculture will present testimony on legislation that should
be provided to prevent excessive speculation on the commodity
exchanges.
Item four makes recommendations .for the -intensification
of activity of savings bond sales., as an anti-inflationary action.
As the President said in his message of November 17:
"Another effective weapon against inflation Is Increased
savings by the public. Every dollar that is saved instead of
spent is a dollar fighting against inflation. In order to
encourage additional savings, the Government should Intensify
its vigorous efforts to sell savings bonds."
Since the war, as an economy measure, the Treasury Depart­
ment has curtailed enormously the organization of the savings
bonds division, and has resorted primarily-to those programs
for which the voluntary cooperation of individuals and businesses
could be recruited. While this procedure has been eminently
successful and has produced most satisfactory results in main­
taining bond sales in excess of bond redemptions, it still has
its limitations.
Up to now the day-to-day efforts of the Treasury savings
bond sales organization has been to maintain the popularity of
the payroll savings plan among American, workers and to sell to
the American people the idea of investing regularly for their,
own good. This program has formed an important part In the
Treasury's fiscal policy.
During the war it was obvious to people why we needed the
savings bond program. Everyone could see that the Government
needed dollars -- over and above taxes -- to buy munitions and
pay wages and subsistence for our armed forces. Each-of us had
someone - son, daughter, brother, sister, loved one - in
service and therefore had a direct interest. And, in addition*
everyone could understand that savings bonds helped to absorb
inflationary dollars which were accumulating at a rapid rate

Art
- 6

-

because incomes were growing while goods and services available
for purchase were not increasing accordingly due to the fact
that war goods were using up materials and labor.
But now that the war is over many people do. not understand
the importance of the savings bond program today.
The savings bond program absorbs excessive purchasing power
in the hands of individuals. This cuts down spending pressures.
For this reason, emphasis is being placed -- and will continue
to be placed -- on the payroll savings plan for workers and on
bond programs for individuals, and especially farmers. The
important funds to obtain are the small amounts invested regularly
by millions and millions of people. It is the money which is
more likely to go on a spending spree that is the most important
to get invested in savings. The investor we want most is the
individual -- the worker with good income and the farmer whose
income is at a high level.
Bond sales of this character are important from a fiscal
point of view even if we have a balanced budget, for they
widen the ownership of the debt and provide a sounder debt
structure. At the same time the sale of these savings bonds makes
an important contribution to the control of'inflationary pres­
sures .
It withdraws funds in the hands of the individual from the
spending stream thus providing funds which enables the Treasury
to retire bank held debt. This in turn results in a reduction
of the money supply in the economy.
In order to increase the sale of United States Savings Bonds,
however, we have an intensive selling job to do.
The Treasury Department is ready to move right away on an
enlarged savings bond sales activity. But this increased sales
activity will require additional funds over those earmarked for
this purpose in the budget for fiscal 1948. We are therefore
asking the Congress to give approval to the use of additional
funds for the savings bond program over and above those approved
in the budget,
The present greatly reduced staff in Washington and in the
field can be expanded immediately. With additional personnel
and funds for promotion, the number of purchasers on payroll
savings plans can be greatly increased and the sales of savings
bonds materially multiplied.
Incidentally, I think that you would be interested to know
that total sales of savings bonds are continuing to exceed
redemptions and the volume outstanding has reached a new high nearly $52 billion. In E bonds alone there are $30,894,000,000

outstanding; this volume is today within one-quarter of 1 per­
cent of the peak volume of E bonds outstanding at the close
of the Victory Loan nearly two years ago. We have been able,
in other Words, to increase the savings bond total and to
sustain the volume of E bonds outstanding throughout this period
of postwar readjustment.
This has been a.tremendous accomplishment. There were
those, you remember, who predicted that the termination of the
war would be followed by wholesale cashing of savings bonds
and the liquidation of much of the. effect of the wartime savings
bond sales effort.. The truth is that this just didn't happen.
The redemption record of United States savings bonds is a cause
for considerable gratification for all of us. It is a tribute
to the people who sold the bonds during the war and to the
people who purchased them. I am confident that with the ad­
ditional effort that will be provided by additional funds, good
results can be obtained,
I have ^witb me today representatives of the Treasury Savings
Bonds Division who are prepared to present, with your approval
some Interesting statistics in this field.
0 O0

I

62

TREASURY DEPARTMENT

Washington

Press Service
Noo S-541

Alternative methods of widening the Social Security system are examined
in a study réleased by the Treasury Department today under the title "The
Extension of Old-Age.and Survivors Insurance to Agricultural and Domestic
Service Workers and to Self-Employed Persons."
Prior to the. war about 2,600,000 persons' were engaged in domestic .
service at any one time, most of them women. During 1946 about 3,500,000
persons worked as hired agricultural workers, but the number-varied
seasonally. There are about 11,000,000 self-employed persons, farm
operators constituting the largest single occupational class — about
one-half the total number. Large portions also are in retail trade,
service industries and the professions.
Congress postponed application of the old-age and survivors insurance
program to these and certain other groups when the Social Security Act
was adopted in 1935* Coverage was limited to employees in commercial and
industrial enterprises, it being felt that administrative experience should
be accumulated‘before other groups 'were brought into the system.
Operation of the social insurance program for ten years and develop­
ments in other tax fields have produced much helpful data and resolved
some of the problems envisaged at the time the program was inaugurated.
It is noxv evident that administrative considerations no longer constitute
an important barrier to the expansion of coverage, in the event the
Congress decides to extend the protection of the system. How to manage
the collection of the Social Security taxes from the groups proposed for
coverage is, however, a primary problem.
The study released today docs not attempt to answer the public policy
question involved In extending coverage, nor does it contain specific
recommendations. It describes three plans which might be employed for
the extension of coverage to agricultural and domestic workers. They ares
(1) the return system currently- employed under the program; (2) the .
present return system supplemented by employee wage books, or book-return
system; and (3) the present return system supplemented by a stamp system.
The present system requires each employer affected to withhold the
employee's social security tax from his wage payment, to keep detailed
records of both wages and tax, and to remit both'the employee' s and the
employer's tax with a return each quarter.

)

- 2 -

Under the book return system* small employers not accustomed to keeping
permanent records would not be required to institute them* or to fill out
detailed wage payment schedules for payroll tax purposes* Instead, the
employer’s work would be simplified through the use of wage books, one for
each employee, with detachable shoots* The sheets would serve as returns
for reporting taxes and wage payments.
Under the stamp system, each employee would have a stamp bock, and the
tax would be paid through the purchase of stamps by the employer and his
affixing them to the book as taxes fell duo. The stamps accumulated in a
book would represent the employee’s continuing wage and tax payment record.
An employee would receive a new stamp book twice a year and would return his
old book" to the Social Security Administration, where his social security
account would be credited for the wages represented by the stamps in his book,
Both the wage-book plan and the stamp plan are regarded as supplements
to the present return system which would be used wherever practicable*
The plan discussed for the coverage of the self-employed would require
such persons to file social security tax returns and pay the tax directly
to the collectors of internal revenue, much as taxpayers now file income
tax returns.
The s elf—reporting plan calls for the imposition of a tax on self—employe
persons measured by selected ix-ems of income reported for income tax purposes.
It would segregate that part of total income most nearly comparable to wage
income and analogous to earned income, and the social security tax would be
paid on such income not in'excess of $3,000, less amounts which have been
subject to payroll tax withholding*
¡W p filíS w '

OH U* i ; 4

Wpó'ríi

Segregation of earned income from total soIf—employment income is
essential to place the self-employed on a par with recipients of wages so
far as concerns the imposition of the social security tax. Procedure for
effecting this, segregation is laid down in the plan. The,study covers
such problems as joint returns, community property-, partnerships, etc*
An appendix to the study gives a detailed comparative description of
plans for the coverage of agricultural and domestic employees. A second
appendix enumerates items which would enter into the computation and
reporting of the self-employment income.

THE EXTENSION OP OLE-AGE AND SUA' IVORS INSURANCE
TO AGRICULTURAL AND DOMESTIC SERVICE WORKERS
AND TO THE SELF-EMPLOYED

Division of Tax Research, Treasury Department
Noveiriber 19^7

64

The Extension of 01d-“-ge-and Survivors Insurance
to Agricultural and Domestic Service Workers
. and to 'the Self-Employed

The present so.cial security system provides old-age and
survivors insurance protection to employees* in commercial and
industrial enterprises»
It leaves other categories of workers,
including self-employed persons and agricultural and domestic
■service employees, without such protection» At the time of the
adoption of the Social Security Act of 1935» the Congress •
postponed application of'the program to these groups because of
special administrative difficulties, pending the accumulation of
•administrative experience with a more limited program.
In the
•meantime, the case.for extending the old-age and survivors
•insurance program to thèse groups,.among others, has been gain­
ing increasingly vide recognition® This report explores
alternative methods of achieving such extended coverage.
It
does not contain.any specific recommendations, and is designed
•to, .facilitate discussion of the relevant issues by providing
analytical and background material.

The study was prepared in the Treasury Department by
representatives of the Bureau of Internal Devenue, the Office
of Tax Legislative Counsel, and the Division of Tax Research.
Valuable assistance and suggestions were réceived from the
Bureau of Old-Age and Survivors Insurance of the Social Security
Administration and the -"Staff of the Joint Committee on Internal
Revenue Taxation, but the material contained herein does not
necessarily represent the views of these organizations.

Division of Tax Research
U. S. Treasury Department

November I9U7

The Extension of Old-Age and Survivors Insurance
to Agricultural and Domestic Service Workers
and to the Self-Employed
Table of Contents
I.
II.

Page No,

In tr o due t,iqn.

1

Plans for the Coverage of Agricultural and Domestic Workers.

6

A.

Introduction....... .
1. Domestic employment ...
2. Agricultural employment

B,.>. Alternative plans., of coverage ,
* .lo. Plan I* - Present return system
Plan II.- - Book-return system..
Plan III.
.Stame- system
,vQ. .¿elected..administrative- issues . . . . . . . . .
. 1 «. .identification o f ,employer- >..;.u4... * > v.
.
,2 . .identification of. employ.eei5'.in. agriculture •<
3 >* .Payments in. kind >:>. *>>• • • • •»* ••. *■-.;1 .,
III.

6
g
9

10
11
13

16
18
IS
19
19

Plan for..the-Coverage of the Self-Employed,

20

A.. .The tax base ........ .*,•*...
•> >-*••**... .
■
, 1.! .Profits from trade or. business
f.
2» Interest, dividend.and royalty income
3 • B e n t s ..... .............. ...........
..Capital gains -and annuities
...
.,, 5 • Net.operating los ses
6. Partnership profits
.
7» Adjustment for taxable wages.......

21

B » 't Exempt ion from ..tas

25

C.

Tax rate .

27

D.

Other
1.
2.
3»

2S
2S
2S
29
29

k,

\§*+

kp.
5*
6.
7»
Appendix A;

Appendix B :

considerations .................... ................
Joint returns .............. ............ ...........
Community property ....................... ....... .
Partnerships ............................. ..........
Accounting periods and m e t h o d s ..... .......... .
Exclusion of nonresident citizens, aliens, etc. ...
Tax decisions to be binding for credit purposes ...
Reporting of self-employment tax .............. .

23
23
23

2k
2k
25
25

JO
JO
31

Detailed Comparative Description of Plans for ■ “ •
■
Coverage of Agricultural and Domestic Employees ......

32

Items for Computation and Reporting of SelfEmployment lax ........................... ...

kk

The Extension of Old-Age and Survivors Insurance to Agricultural
and Domestic Service Workers and to the Self-Employed

I.

IlfPRODUCTION

The Social Security Act, approved on August 14,
14, 19
1935, provided
United .States for the first time with a general
old
al old-age
insurance
program apd^shifted this country from among the more backward to the
:mope advanced countries in the field of social security* Its comprehensive character, notwithstanding, the 1935 Act provided old-age
insurance,coverage for .only part of the country’s copulation; it left
large groups of people outside the program*
■■
The principal groups excluded from the benefits of the old-age
insurance program were agricultural workers, domestic service workers
sef-employed persons, governmental employees, employees of educational
religious and charitable organizations, and persons employed in the
railgoad industry. In 1946 these categories included about thirty
Million people and represented approximately 40 percent of the countrv1
paid employment. .
,: •
delusion of .the several groups from the program was prompted
y liferent reasons. Railroad employees were covered by a separate
system established by the Railroad Retirement Act of 1935. Govern,mental employees were excluded partly because some were covered under
existing pension schemes and partly because of legal barriers to the
imposition of a Federal tax on State and local governments in their
capacity as employers. Less tangible reasons lay behind the exclusion
oi the employees of educational and other non-profit organizations.
Agricultural and domestic workers, and self-employed persons
how aggregating about 19 million, were not covered principally
because the administrative problems in collecting taxes and'obtaining
proper wage reports were anticipated to be especially difficulte The
oncept of social security Was new to this country and the introduction
insurance program represented a significant departure both
or the Federal Government and the American people* In the initial
•? ages of the program! it-appeared desirable to restrict old-age
insurance to.those areas of employment where the prospects for successui operation were testo Moreover, it was anticipated that as adminis» 1*^®. experience was accumulated. rnn-p.woro/ii
j •u'u

-

2

-

In the case o f the self-em p lo yed , the b a s is fo r e x c lu s io n was
la r g e ly a d m in is tra tiv e in c h a ra c te r and r e la te d to th e problem of
c o lle c t in g ta x e s from self-em ployed p erson s w ith low incom es. The
f in a n c ia l s tru c tu r e o f the co n trib u to ry old -ag e insuranqe system adopted
in 1935 was b u ilt'a r o u n d employer and employee ta x e s on wages c o lle c te d
a t so u rce. I t p la ced prim ary compliance r e s p o n s ib ilit y on the employer
and avoided the need fo r re tu rn s on the p a r t o f in d iv id u a l wage e a rn e rs.
This mechanism o bviou sly was not a p p lic a b le to the self-em ployed where
employer and employee are one and- the same p erso n . The fin a n c in g o f
s o c ia l s e c u r ity b e n e f it s fo r the self-em ployed ha.d to be b u i l t around
some a lt e r n a t iv e ' s tr u c tu r e in v o lv in g s e lf - r e p o r t in g by covered p erso n s.
The mechanism which held most prom ise appeared to be an a d a p ta tio n of
th e procedures used fo r income ta x purposes* S in c e , however, the
income ta x o f those days employed la rg e p e rso n a l exemptions and was
a ta x payable by a r e l a t i v e l y sm all segment o f the p o p u la tio n , i t s adapta­
tio n f o r s o c ia l s e c u r ity purposes would have requ ired inn ov ation s which
were then regarded to involve -too much r i s k . The r e te n tio n o f income
ta x exemptions fo r old-age insu rance pu m oses would, in e f f e c t , have
e n ta ile d the e x c lu s io n o f p r e c is e ly those self-em ployed p erson s who
were most in need o f s o c ia l s e c u r ity p r o te c tio n . The d r a s t ic red u ctio n
o f exemptions or t h e ir complete e lim in a tio n , on the o th e r hand, involved
q u estio n s o f enforcem ent ■ p r a c tic a b ility which were then d i f f i c u l t to
a p p ra ise .
Another problem which had to be re so lv e d p rep a ra to ry to the
assessm ent o f ta x e s a g a in s t the self-em ployed r e la te d to the se p a ra tio n
o f th a t -part o f t h e ir income a t t r ib u t a b le to p e rso n a l s e r v ic e s from
the b alan ce due to c a p i t a l investm ent. The ta x which com prises a
c o n trib u tio n fo r old-age s e c u r ity should apply only to the cou n terp art
o f wages — to ■ personal s e rv ic e income which sto p s when the worker
r e t i r e s and which e s ta b lis h e s both the tim ing and the s c a le o f h is
re tire m e n t b e n e f it s . Fere a g a in , income ta x exp erien ce was re le v a n t
and in d ica te d th a t t h is type o f se g re g a tio n was frau gh t w ith d i f f i c u l t i e s .
The p r in c ip a l co n sid e ra tio n which In flu en ced the d e c is io n to d elay
the coverage o f a g r ic u ltu r a l a,nd dom estic w orkers under the o r ig in a l
s o c ia l s e c u r ity program r e la te d p r in c ip a lly to the enforcem ent of
s o c ia l s e c u r ity ta x e s and adequate wage r e p o r ts . A l e s s e r problem was
the v a lu a tio n and ta x a tio n o f income re ceiv e d in kind.
Since under the program e l i g i b i l i t y f o r b e n e f it s a.nd the s iz e
o f th ose b e n e fits 'w e r e to depend upon e a rn in g s, i t was e s s e n t ia l to
o b ta in a. complete and a c c u r a te record o f the earn in g s o f each
a g r ic u ltu r a l and. dom estic employee. This req u ired employers to e s ta b lis h
and m aintain reco rd s o f each wage payment ma.de to th e ir employees.
While some employers were a lre a d y keeping reco rd s o f t h is type, i t was
b e lie v e d th a t most farm o p era to rs and p a r t ic u la r ly housewives would
fin d i t burdensome to comply w ith the requ irem en ts, both because of
t h e ir unfa.m ili a r i t v w ith record -keep in g and because o f the rapid la b o r
tu rn -o v e r.

66
-

3 -

During the ten years of the old-age and survivors insurance
system, the need for the expansion of its coverage has frequently
«
received publie recognition* In 1938 the Advisory Council on Social
Security, established jointly by the Seriate Finance Committee and the
Social Security Board, recoipiended in its final report the coverage
of most excluded occupations as promptly as possible* This was
followed by similar recommendations made by the Social Security Board
and the President, just prior to the commencement of the Congressional,
hearings which led to the 1939 amendments of the Social Security Act*
That législation made important revisions in the system but, except
for several small groups, failed to broaden the coverage of the
program.
Interest in expanded coverage continued. The Social Security
Board recommended the enactment of legislation to .this end in virtually
every one of its annual reports. Prom time to time the President
made similar recommendations to,the Congress* In.his 1946 Budget
Message and again in 1947, President Truman called attention to, the
absence of social security protection for large segments of the popula­
tion particularly in need of old-age security, and suggested legislation
to.eliminate the existing inequity*
During every session of Congress a number of bills were introduced
providing for the extension of coverage either as a separate step or
as part of comprehensive social security revision- Potable examples
of recent proposals are those sponsored by. Senator Wagner, Senator
Murray and Representative Dingell for broad changes in the entire
social security program, and by Senator Magnuson to provide a separate
retirement program for all those not covered by existing Federal retire­
ment legislation* The legislation pending in this session of Congress
is illustrative of the varying approaches to 'the general problem*
Senator Murray’s bill (S. 1679) would make extensive revisions in the
program including expanded coverage* Senator Magnuson has re-introduced
îfr k*11 (Sv 681)» Representatives Curtis (H.R. 2046) and Bennett
vS*R. 3457) propose coverage for the self-employed* Bills introduced
by Senators Young (S. 508), Aiken and McFarland (S*-1743), and by
Representatives Beall (H.R* 2022), lynch (H.R. 2448.), Curtis (H.R. 1892)
among others would extend old-age. and survivors insurance to other
groups not now protected by the program.
The Ways and Means Committee undertook an investigation of
various phases of the social security program, including expanded
coverage, in 1945-46* Its staff of technical experts (appointed
pursuant to H* Res* 204, 79th Congress, 1st Session)* in reporting on
tüis aspect of social security revision, concluded that it.was feasible
to extend coverage to the self-employed, and-to agricultural and domestic
workers* Following the report of the Technical Staff, the Committee

- 4 -

conducted extensive hearings« Virtually every witness who addressed
himself to tfce problem, including representatives- of business, labor,
‘farm organisations, Government, and religious, welfare and educational
groups,, favored extension of coverage ^o these categories of workers*
In his testimony before the Committee, Commissioner ALtmeyer''of the
Social Security Administration emphasized the need for extending the
Coverage of old—’age. and survivors insurance, and presented in some
detail a -plan for covering seif— employed persons« Agricultural and
domestic workers, he indicated, might be covered either by a stamp plan
or by a system of employer reports«
The growth of interest in the extension of social security •
coverage during the past ten years was accompanied by the accumulation
of administrative experience whiclq r.rsolved some of*the problems
envisaged at the Lime the program was first developed« The wsrtime
reduction of personal exemptions under the individual income tax to
$500 per taxpayer provided experience with tax returns from low income
‘
r écipients* In the 'case of most farm operators and many employers
of domestic service workers, it established the need for the maintenance
of operating recordso
Those deveJ.opments have direct application to
the problem encountered in the extension of old-age insurance coverage*
Other developments, such as the farm aid programs and rationing, have
contributed to making the population record conscious* Administrative
author!ties have acquired more than ten years of experience in enforcing
social security taxes u .der diverse circumstances* At the same time,
the generally high level of economic activity, including- employment,
reduced the rate of labor turn-over in domestic employment and the
burdensomeness of employment taxes* These developments have improved
the case for the extension of old-age insurance coverage*
•The present report, which draws heavily on the Treasury Department’s
experience with the .administrâtion of the, tax aspects of the social
security system, examines the problems of extended coverage and discusses
alternative plans for bringing the self-employed, arid the agricultural
and domestic workers into the system» In examining the availab-le
alternative's, it appeared desirable to confine; detailed consideration
to 'those* plans which were consistent wi.th the principal characteristics
of the existing social security system« Consequently, -somëi plans which
under other circumstances would deserve careful évaluation wore not
considered®
The present social security program is financed by a payroll tax
imposed at a rate of one percent eac.i on employees and employers. The
receipts from this tax have been sufficient to pay the current cost of
benefits and to build up a substantial reserve, :and are expected to con
tinue to do so for some years to come, notwithstanding anticipated
increases in aggregate benefit payments, Xt is estimated on. the. basis

- 5-

67

of a relatively optimistic set of consistent assumptions regarding the
long-term operations of the'system (high wages, low retirement rates,
etc»),; that the level cost of -the system is about 3 percent of.payrolls.
Under a less optimistic setrof assumptions, the level cost of the system
is estimated at approximately 7 percent of payrolls*
Nevertheless
a combined tax rate.of only 2 percent has been continuously in effect since
the origin of;the program, with.the result that the system has been
operating at an actuarial deficit, even if the most optimistic set of
economic and demographic assumptions underlying the calculations made
thus far should materialize; In the absence of an adequate .increase '.-in
the payroll tax, the deficit will presumably be made up from the .
.
Government1s general fund when the cash benefit obligations of the
system warrant it.
;<
This prospective dependence of the system upon some financing
from the general fund prescribes in some measure the plans available
for the -coverage, of hitherto uncovered .groups. It precludes, for
instance, recourse., to a plan for voluntary coverage#. Under such, a
plan, tho.se who could best afford to come into the system would do so,
while some of those whose need for protection is greatest would not
acquire social security coverage. As a result the general fund would
tend to subsidize social insurance protection for the benefit of a select
group of individuals: who need it less than some .of those not covered.To safeguard the principle that, the Government’s general funds serve
the purposes of all the population on a fair and equitable basis, it
is necessary to limit the choice of plans for .the extension of coverage to
those which extend protection on the basis of reasonably fair classifica­
tions* Voluntary coverage, dependent as it is.on the financial position .
of the insured, would not meet this test.
It should also be noted that
there are other objections
a voluntary system. For example, it would
tend to involve an adverse selection of risk and would thus imposeadded financial bu-rdens on those who are compulsorily covered by the
program.
_

to

A further illustration of how the characteristics of the present
system restrict the alternative approaches to broader coverage- may
be cited. Prom some points of view, there is much to be said.for a
plan of direct reporting by agricultural and domestic workers them­
selves by means of an annual return of wages and payment of taxes,
similar to that required under the income tax and Under a plan discussed
below for self-employed persons.
Such a plan would preclude the
collection of a tax from the employers of such workers, and would
involve corresponding discrimination betweenemployment in commerce
and manufacturing a n d .employment in agriculture and domestic service. °
■oreover-, it is likely that such a plan would halve to exclude a
substantial number-of employees. • It was for these reasons ruled out of
consideration.

6

-

The p la n s developed below*accord c lo s e ly w ith the requirem ents o f
the e x is tin g ' s o c ia l s e c u r ity program* They d e a l only ..with the ta x
c o l l e c t ion asp ects" o f the problém. No attem pt has ijeen.made to develop
s p e c i f i c b 'e n e fit p ro v is io n s ap p ro p ria te to the .proposed ta x p la n s .
S in c e , however, the p la n s have "been molded as nearly ..as p o s s i b l e . to . the
p re se n t "benefit s tru c tu re and i t s q u a lify in g p r o v is io n s , th e develop­
ment o f p a r a l l e l b e n e f it p ro v is io n s should not p re se n t s p e c ia l .
..
d iffic u ltie s ^ ’
,\v
/ hp
^
X
I t should "be noted, a lso * th a t t h is a n a ly s is o f' a lte r n a tiv e , .approaches
to extending ‘ coverage in v o lv es o f n e c e s s ity a la rg e ..element o f .judgment.
The advantages claim ed f o r one approach as a g a in s t an oth er,, a te to a
la rg e e x te n t based uron ta x c o lle c t io n exp erien ce under d .iffe ro n t dircum—
sta n ce s than th ose which w ill p r e v a il when coverage i s extended.*. Ne..have
had, f o r example, e x te n siv e exp erien ce w ith the ta x a tio n o f low in c o m e s..
N ev erth e less, i f in co n ju n ctio n w ith a ta x on the self-em ployed w ith low
incomes, a -program o f b e n e f its d ir e c t ly r e la te d to th a t ta x were i n 't r o - .
duced, p a st exp erien ce would not, n e c e s s a r ily provide,, á r e l i a b l e .gauge o f
the compliance to he exp ected . The payment o f b e n e f it s in tro d u ces a new
f a c t o r which may produce more, fa v o ra b le r e s u lt s than those obtained when
no quid pro quo was a s s o c ia te d w ith payment o f th e ta x .
On the b a s is o f the stu d io s th a t have been made, i t appears evident
th a t a d m in is tra tiv e co n sid e ra tio n s no lo n g er c o n s titu te a b a r r ie r to.
expanded co v e ra g e.' The a d m in is tra tiv e problem s a re d i f f i c u l t , as was
the Casé when the e x is t in g program was i n i t i a t e d , but given a moderate
p e r io d -o f exp erien ce and adequate a p p ro p ria tio n s for. the a d m in istra tio n
o f the enlarged a re a o f coverage, th ey can he re so lv e d . Moreover, ta x .
c o lle c t io n fe a tu r e s and. c o s ts a re but.som è o f the f a c t o r s to..be.
co n sid ered . -Other elem ents such a s equity.am ong d if f e r e n t groups and
the p o s s ib le red u ctio n o f p u b lic a s s is ta n c e ' c o s ts which are borne out
o f g en era l revenu es, a s w ell a s p u b lic a t t it u d e s toward s o c ia l se cu rity ,
and o th e r s o c ia l c o n s id e r a tio n s , a lso e n te r in to the e v a lu a tio n p ro c e s s .
Whether the o ld -ag e and su rv iv o rs insu rance p ro g ra m .is to a ffo rd p ro -t e c t io n to segments o f the p o p u la tio n now deprived, o f . i t s b e n e f it s , i s
a q u estio n o f p u b lic p o lic y to be determined in the lig h t o f these
c o n sid e ra tio n s .
11 • PI-ANS NOR THE
A.

In tro d u ctio n

COW?AGS

ON AGRICIIL.TUHAL AND DOMESTIC WQHITgRS .
"

The b a s ic problem in h ere n t in the e x te n sio n o f cld -a g e and .,
s u rv iv o rs 'in s u ra n c e coverage to a g r ic u lt u r a l and dom estic s e rv ic e
workers i s a s s o c ia te d w ith the economic c h a r a c t e r is t ic s o f. th ese groups.
The sm all number o f employees p er employer, the com paratively low le v e l
o f wages, the r e l a t i v e frequency o f season al work, the geographic d is ­
p e rs io n o f em ployers, the la c k o f employee o rg a n iz a tio n s and the
inadequacy o f employer reco rd s make fo r c o s tly a d m in is tra tio n . Although
the f e a s i b i l i t y o f coverage in t h is a re a cannot be a sse sse d p rim a rily
on the b a s is o f a comparison o f the r a t io o f co s t of a d m in is tra tio n to

- 7 -

tax collections with that under either the present social security urogram
or the Federal tax system as a whole, the consideration is relevant, and
together with the cost of maintaining records required for the determina­
tion of benefits, will have an important hearing upon the evaluation of
the alternative plans described below.
The average number of workers per employer under present coverage
is high compared with that in agriculture and household employment,
approximately 20 employees in commerce and industry and only about 1*5
in agriculture and even less in domestic service.. To be sure, these
averages exaggerate the differences between these broad groups.
It is
important to note that despite the high average per employer under
present coverage, fully one-half the employers have three or less
emplo,vees .and more than ^ne—fourth have only one employee. Likewise, the
low average in agriculture tends to obscure a high degree of concentra­
tion. Thus, about 600,000 farm operators in 19^5 (about one-fifth of the
agricultural employers) employed. 80 Percent of the hired farm labor used
in that year. While there are large areas within agricultural and
domestic employment in which the costs o f .administration would compare
with those now involved in collecting contributions from small industrial
employers, the average cost for the group as a whole would be higher.
A low average number of employees per employer means a relatively small
amount of tax per return and relatively high administrative and enforce­
ment costs in relation to collections. 1/ Under existing coverage,
collection costs amounted to
cents per $100 of revenue for fiscal year
19^6, and with broader coverage this ratio would undoubtedly be increased
(assuming no change in tax rates).

J1

Another consideration, relevant in the case of domestic employment,
is that wages paid to domestic workers in a private home are not allow­
able as a deductible expense in computing net income for income tax
purposes and hencé the income tax cannot act as a deterrent to under­
reporting of social security taxes in this area.
Still another considera­
tion is the circumstance that the proportion of employees who are seasonal
°r part-time workers and shift from one employer to another during the
course of their annual employment is much higher in agriculture and
domestic service than in commerce and industry.

_/ It should be noted, however, that the unit cost of covering other
non-covered groups, such as employees of non-profit institutions
and Government employees, may be expected to be less than for
agricultural and household employment.
Consequently, with a program
of complete coverage, costs in relation to collections may not be
significantly greater than at present.

- g -

■ X.

Dom estic employment

'

. ,

P r io r to the war about 2 .6 m illio n p erson s were engaged in 'd o m e stic
s e rv ic e a t any one tim e. 1 / T h is m aybe assumed to re p re se n t roughly the
normal fo rce in t h i s o ccu p ation , although in p e rio d s o f f u l l employment
i t may be co n sid e ra b ly sm aller becau se o f o th e r more a t t r a c t i v e employment
o p p o r tu n itie s ! The g re a t m a jo rity o f dom estic workers a re women. 2_f .......
There, were .about 1 ,6 5 0 ,0 0 0 employed dom estic workers in Ju ly 19^6, of
whom 1 0 0 ,0 0 0 were men. About o n e-fo u rth o f the women were m arried and
liv in g w ith t h e ir husbands, acco rd in g to the l a s t p o p u latio n census.
About ?.J p e rce n t were ^5 y ears old- o r o ver, j/ and more than h a lf were
o i the white r a c e . In the country a s a whole, alm ost o n e -th ird o f the
dom estic'W orkers, liv e d in r u r a l a r e a s .
An estim ated o n e -th ird o f the dom estic workers were ^ l i v i n g - i n , 11
acco rd in g to sample s t a t i s t i c s from the I 9 UO censu s. In a l l , o n e -h a lf
o f the dom estic workers had jo b s the y ear round, and may be considered
re g u la r f u ll- tim e employees. Another' fo u rth may a lso have been re g u la r
employees on a p a r t-tim e b a s is , but t h e ir number i s in d eterm in a te.
D ata on the number o f employers o f dom estic la b o r are not a v a ila b le ,
but a s a working b a s is i t is- assumed th a t on the average th ere are thred
employers f o r every two d om estic'w ork ers.
- . E arnings ware very low f o r most dom estic workers b e fo re the war;;
The annual median cash earn in g s o f f u ll- tim e workers amounted to l e s s
than &U00* The e x te n t to which th ese earn in g s were augmented by incomein -k in d i s unknown. I t i s l i k e l y th a t in a d d itio n to those ”l i v i n g - i n , n
many o th er dom estic workers re ce iv e d some income in kind. There i s
some•s c a tte r e d evidence th a t cash wages of f u ll- t im e dom estic workers
have more -than doubled sin ce the beginning c f the war. Taking in to
account the volume o f p a r t-tim e employment, the average cash wage o f
dom estic workers -may s t i l l be only $700 or $000 a n n u ally .
A pre-w ar survey of white dom estic workers in Chicago rev ealed
th a t approxim ately o n e -s ix th o f: tho workers had been employed in
covered in d u stry sometime sin ce: the enactment o f the program. I t i s
l i k e l y , however, th a t a much la r g e r p ro p o rtio n o f such workers acquired
some sociaJL s e c u r ity coverage during the war which, in the absence o f
expanded coverage, w ill be l o s t .
1/ I f ch a u ffe u rsj gardeners and p r a c t i c a l n u rses are excluded, the
t o t a l is- about 2o3.-.m illio n p e rso n s; The p ro p o rtio n s and p ercentage
fig u r e s in t h is s e c tio n are based upon: the sm aller t o t a l .
2 / In 19*40:,' only 1 5 0 ,0 0 0 men were i n ’ th is o ccu p atio n al group.
3 / Among fem ale c l e r i c a l and sa le s .w o rk e rs only 13*7 p e rce n t were in
t h i s age group.

69
_ Q
7 _

2.

Agricultural employment

During 19^6,~about 3*5 million.persons worked as hired agricultural
laborers. The number of workers grew from a more or less permanent
force of about 1 million employed at the beginning of the year to about
3 million in the fall harvest period. Thirty-three percent '•f these
workers reported that farm wage work was their major activity ana the
only kind of work they had done .in ,19^6. This 33 percent of the
workers, which included most of the regular hired hands, accounted for
60 percent of the total time worked at hired farm work during the year*
In contrast, .the school, youths, the housewives, and the miscellaneous
group— that together made up 27 percent .of all the workers*— accounted
for only 10 percent of the days of hired farm-labor.
They were used
mainly in seasonal rush jobs. An additional 19 percent (53^>000)reported that they operated a farm during 19*+6 and for most of these,
hired farm work was secondary to the operation of their own farms. This
group accounts for 12 percent, of the hired farm work done during the
year* Twenty-six percent, of the farm wage workers, however, also had
earnings from nonfarm work. This group which represents the overlap
of the farm and nonfarm labor market accounted for 18 percent of the
hired farm work done during the year.
Geographically, the southern States account for the'largest pro­
portion of hired farm workers. Depending upon the season, this area'
accounts for between ^-0 and 50 percent of the. workers. The western and
north central States each account for about one-fifth and the north­
eastern States for the remainder.
'
,
About three-fourths of the hired farm workers in 19^5 were men,
more than half of whom were heads of ..households« Aoeng the women only
about 10 percent were heads of.households. Many of the farm workers
are young people, about 20.percent of the men and
percent of the
women being less than 20 years old. However, almost one-third of the
men may be fy-5 years of age or over. ■ ~ ’ '

J>0

The earnings of agricultural workers vary geographically and
according to whether they are regular or seasonal workers.
The lowest
wages are earned in the South and the highest in the West.
In September
19^ 5 . average da-ily earnings ranged from $ 2*90 in the southern to
$6.SO in the western States. The farm wage bill for 19^3 divided hy
the average monthly number of. farm workers indicated an average wage of
approximateljr $S00. , In 1939» the median cash Income of farm workers
was approximately $ 260.

-

10

-

Another f a c t o r e n te rin g in to the ea rn in g s o f a g r ic u lt u r a l workers
i s the wages—in —kind which they r e c e iv e . The n o st im portant p e r q u is ite
item i s housing. In September 19^5» a"bout
p e rce n t o f the farm
workers re ceiv e d lo d g in g or were allow ed the use of a house, in clu d in g
14 p e rce n t who re ce iv e d both housing and m eals. Only 3 p e rce n t re ceiv e d
meals but no housing. Although p e r q u is ite item s are fu rn ish ed to
re g u la r workers more fre q u e n tly than to season al w orkers, ,-cver o n e-fo u rth
o f the l a t t e r re ceiv e d meals or housing or b o th . Other ty r e s o f p e r­
q u is it e s a re a ls o given to a g r ic u lt u r a l w ork ers , such as the use o f a
garden p lo t , equipment, an im als, and produce. In the a g g reg a te , the
value o f p e r q u is it e s .is estim ated by the Department o f A g ric u ltu re to
have been about $350 m illio n in 19^5* . The v a lu es o f p e r q u is it e s given
to in d iv id u a l workers are not a v a ila b le * bu t r e la te d data in d ic a te
th a t th e d a ily value o f meals ranged from Uo ce n ts in South C aro lin a and L o u isian a to $2 in the S ta te o f 'fash in g to n .
Although th ere were n e a rly 6 m illio n farm s in 19 I+5 , only about
2 .5 m illio n used h ire d workers- P rob ably 3_ess than one—h a lf m illio n
used h ired la b o r throughout the y e a r. The o th e rs employed workers f o r
varyin g p erio d s o f tim e, ’tut in most ca ses the t o t a l amount o f la b o r
h ired was small.- During I 9U5 th ere were an estim ated 1. 7 m illio n farms
each u sin g le s s than 75 man-days o f h ired la b o r . On the av erag e, th ese
farm s used only 2 0 . 9 . man-days, and in the aggregate they accounted f o r
o n ly 7*6 p e rce n t o f th e 1 t o t a l number o f h ired man—days during the year*
The annual cash wage b i l l on th ese farms averaged l e s s than $100.
i
rena in in g 1 .1 m illio n farm s h ired co n sid e ra b ly more la b o r
during 1945 . About o n e -n a if m illio n farms h ire d up to 250 man—days o f
la b o r . On the av erag e, th ese farms used 119 man-days o f la b o r and had
an annual cash wage b i l l of about $550. Another 6 0 0 ,0 0 0 farm s, u sing
SO p e rce n t o f the h ire d manpower employed during the y e a r, makes up the
2 .5 m illio n farm s. These farms used a t l e a s t one-man y ear o f la b o r each
and had average annual wage b i l l s in e x ce ss o f $ 1 ,0 0 0 . The t o t a l cash
wage b i l l f o r h ired farm la b o r in 19^-5 i s e stim ated a t $ 1 .9 b i l l i o n .
B.

A lte rn a tiv e p la n s o f covera ge

S ev eral type's o f mechanism are a v a ila b le f o r the c o lle c t io n o f ta x es
and wage d ata w ith re s p e c t to a g r ic u lt u r a l and domestic.employment,
ranging from a simple e x te n sio n o f th a t now in use to one which combines
w ith th a t system e n t ir e ly new m achinery. The d is c u s s io n below suggests
th a t a s e le c tio n from among a lt e r n a t iv e p la n s w ill need to bo made on
the b a s is o f^ s e v e r a l c r i t e r i a , and in the l i g h t o f a d e lic a t e balan cin g
o f th e te c h n ic a l a d m in istra tiv e c o n s id e ra tio n s on the one hand and
the d esired coverage on tho o th e r .

-

11

70

-

Of the a lt e r n a t iv e p la n s which have been considered f o r extending
coverage to a g r ic u lt u r a l and. d om estic workers w ith in the framework o f
the e x is t in g srstern, the th ree most prom ising a r e ; ( l ) the p re se n t re tu rn
system b y - i t s e l f ( 2 ) the p re s e n t retu rn system sûpoienented by employee
wage books (book re tu rn system):, and (3 ) the -present re tu rn system
combined w ith a stamp. system. Bach o f th ese would provide the F ed eral
Government w ith r e p o rts o f wages paid to dom estic and a g r ic u ltu r a l
employees and en able the c o lle c t io n o f the two employment ta x e s - one
from the employer and one from the employee. A ll th ree p la n s have one
p r in c ip a l fe a tu r e in common.-- They provide fo r the use .of the p re sen t
employer re p o rtin g system over a s u b s ta n tia l segment o f a g r ic u lt u r a l
and dom estic employment» w ith in the a re a ;where ,t h e - c h a r a c t e r is t i c s o f
employment are sim ilar;>to those p r e v a ilin g in commerce a.nd in d u stry .
I t i s only w ith r e s p e c t to the b alan ce o f a g r ic u lt u r a l and dom estic
employment th a t the p la n s d i f f e r * . They d i f f e r a ls o .»as to t h e i r e n fo rce ­
a b i l i t y in ir r e g u la r and p a rt-tim e employment w ith corresponding
im p lica tio n s a s to the coverage th ey can p r o v id e .-. T he-p lans d i f f e r a ls o
as to the manner in which the d ata would be re p o rte d , the Government
agency charged w ith the.-enforcement» and. the . e f f o r t e n ta ile d on the p a r t
o f the Government, the employer and th° .employee,. . A .-detailed, ta b u la r
d e sc rip tio n o f th e s e ,th r e e p la n s f o r the coverage o f a g r ic u lt u r a l and
domestic workers w ill ^be found in Appendix .A.: ,,
1. - F la n I . - P re s e n t r etu rn sy ste m.

:

P lan I c o n s is ts , o f the e x te n s io n .to a g r ic u lt u r a l aud dom estic
workers o f the system, o f q u a rte rly . re tu rn s now. employed under the
F ed eral Insurance C o n trib u tion s Act(. , ,
. , , . . ...
Under, t h is system every employer and .employee;i s .assigned an
id e n tifica tio n -n u m b er by the S o c ia l S e c u rity .A d m inistration. Each
ca le n d a r'q u a rte r the employer f i l e s with the. c o lle c t o r o f in t e r n a l :
revenue a re tu rn (Form SS-^la) which re p o rts . thCsem ployer1s,-name, and ....
id e n tify in g number, each -em ployee's account- number, name, and q u a r te r ly ,
earnings, and the computation o f ta x l i a b i l i t y .
The employer w ithholds
the em ployee's ta x from h is wage payment, keeps record s o f both wages
and ta x , and each q u a rte r re m its both the em ployees' and em ployers'
ta x w ith h is retu rn * P e r io d ic a lly or on te rm in a tio n o f employment the
employer fu rn is h e s each employee a statem ent showing h is wages and
enroloyees' ta x .
•The c o l l e c t o r -detaches the schedule .of employee -wage in fo rm atio n
from the re tu rn and. tra n sm its i t -to -the Social- S e c u r ity A d m in istration
where the amount o f-e a c h em ployee's wages-.is p o sted to h is s o c ia l
se c u r ity ac count »

-

12

- TK'è p r in c ip a l; co n sid e ra tio n in 'f a v o r o f P la n I I s i t s ■ u tiliz a tio n
ò f - ro u tin e’s and a d m in istra tiv e '"procedures which'hay© been in use fo r
mòre than te n 'y e a r s * A number Of' employers o f dom estic and a g r ic u ltu r a l
la b o r a r e .already* s u b je c t to the requirem ents o f the e x is t in g system b y .
reà'sòn o f - t h e i r concurrent'em ployment of in d u s t r ia l or commercial
w orkers. * The ^in c lu s io n o f th e ir, a g r ic u lt u r a l and' dom estic employee s '
wages* on t h e ir ‘••quarterly retu rn should hot c o n s titu te any se rio u s burden.
T his p lan depends p r im a r ily on employer,,,.compliance, although i t proyides
sòme s'copëgfor employee p a r t ic ip a t io n in enforcem ent. 1 /
•Goh sid era b l O '-resistan ce and; i n e r t i a 'may be expected a t l e a s t .
i n it ia lly * - f r o m employers who'/are unaccustomed to recordpkeeping» .U nlike
a g r ic u ltu r a l employment, -the wage's .paid fo r d o m e s tic 's e r v ic e Vare not
d ed u ctib le’ f o r income ta x p u rp o ses. Bonce th e re is no in c e n tiv e , . Other
than f o r budgeting,, fo r •a ’housewife to keep a record o f such' wagds* :':1
The sane may be said o f the sm all farm ©implo y e r .who does not file 'in c o m e
ta x -‘retu rn s.. Such, r e s is ta n c e n ig h t be o f f s e t ' in a number o f cases
where-a clo s e r e la tio n s h ip has'd evelop ed between empioyer and employee.
A re s p e c t f o r law w ill overcome r e s is ta n c e in many o th er, c a s e s . -An ..
educational"program* encouraging é rp lo y e e s to remind .t h e ir employers to
w ithhold t h e i r employee c o n tr ib u tio n s , tó i n s i s t on t h e ir annual or
term in atio n r e c e ip t s fo r w ithheld con tribu tion s», .and to .in q u ire -n erio d ic a lly regard ing t h e i r wage c r e d it s a t th e S o c ia l S e c u rity A d m in istration
would a ls o lend co n sid era b le-,a id to enforcem ent. An o f f s e t t i n g
co n sid e'ratio n is. the, p robable u n w illin g n ess o f some employees’ to jeopard
iz e t h e ir jo b s by re p o rtin g the delinquency o f t h e ir employers or to L
d is c lo s e th e ir own income ta x d e lin q u e n cie s*
With a-view to avoiding troublesom e' adm i.nistra.tiVe problems, a s s o c ia te d
w ith -th e coverage o f employees h ire d b y '.o ccasio n al' em ployers! t h is p lan
could b e -d r a fte d so’ as to exclude the pon-hu'sines s connected s e r v ic e s o f
c h ild re n under the age o f l 6 , and the* s e r v ic e s of employees when performed
f o r the employer on l e s s than 'elev en days in any two- co n sécu tiv e calend ar

1 / The S o c ia l S e c u rity A ò m in istra tio n c u r r e n tly ìs s u c s over hCO.OOO wage
statemén-ts an n u ally in re snonse to’ re q ù e s ts fro n employee s , who have
- a u th o r ity under thè P re se h t System to a$k f o r such sta te m e n ts, to
e n ab lé them* to ch eck ori thè accu ràcy ó f ' thè i r S o c ia l S e c u r ity wage
re co rd s.

71
-

13 ~ .

months, provided th a t th e . employer has not p a id ta x a b le ’V a g e sn to kny
other employee during the calen d ar quarter,. JL/ Such a lim it a t io n would
r e s t r i c t the ta x ancL re p o rtin g burdens to the more e s ta b lis h e d employers
who g e n e ra lly have a long-term r e la tio n s h ip V i t h th e.ir employees and
may he in te r e s te d in the old-age s e c u r ity o f such employees« The r a t i o
o f employees to employers under such a p la n would he r e l a t i v e l y h igh,
and the amount of ta x e s due from in d iv id u al employers would seldom he
le s s than, and g e n e r a lly in e x ce ss o f , $1 p e r calen d ar q u arter* Other
methods of. d e fin in g ca su a l la b o r in t h e s e - f ie l d s might be d ev ised , hut
experience alone can provide the b a s is f o r determ ining how much fu r th e r
in the d ir e c tio n of complete coverage the p re s e n t system can he pushed.
2.

P la n I I * — B o o k-retu rn system •

•

.

Under P lan I I a l l employers who keep permanent reco rd s o f t h e ir
own (which would in clu d e - a l l . o f the la r g e r a g r ic u lt u r a l employers) would,
upon a p p lic a tio n to -th e Commissioner, he p e rm itte d ,, and -t h e r e a f te r
requ ired , to fo llo w r.the same procedures as contem plated under P la n I
(q u a rte rly ta x and inform ation re tu rn s on Form S S - l a ) « A ll o th er
employers would he req u ired to f i l e q u a r te r ly ta x .r e tu r n s hut would he
under no o b lig a tio n to keep permanent wage re co rd s or to f i l l -out a
q u a rte rly .wage schedule r e f l e c t i n g the name, s o c ia l se cu rit,v number
and q u a rte rly wages o f each employee, a s under .Plan I ,
Each employee would make a w ritte n a p p lic a tio n each y e a r to -th e
S o cia l S e c u rity A d m in istration fo r h is annual wage hook. The hook
would c o n s is t o f a number o f s h e e ts , each. c o n s is t in g .,^ a stub .and a
detachable slip ., separated by a v e r t i c a l p e r fo r a tio n . The S o c ia l
S e cu rity A d m in istration would e n te r the employee’ s.a cco u n t number (and
h is name, i f p r a c t ic a b le ) on each sheet .o f „.the book* At the time o f the
f i r s t wage payment, the em ployer.would e n te r the amount o f wages, and the
date o f payment , both .on the stub and the slip.-and would i n i t i a l the stu b .
The employer would r e ta in the s lip and o th e r payments in th a t q u a rter
would be en tered , on the same stub and s lip .. Payments in subsequent
qu arters would be en tered on. su cce ssiv e pages in the. book. The book
would co n tain in s tr u c tio n s and an a p p lic a tio n blan k f o r a new book. .
A sample sheet w ill, be found on page 3 5 '
1/ The 11-day y a r d s tic k would exclude from coverage the once—a-week
domestic worker who may have se v e ra l em ployers, each owing an
in s ig n if ic a n t amount of. ta x . I t has been the p r in c ip a l y a r d s tic k under
the F ed eral Insu rance C ontribu tionsA ct fo r the e x c lu s io n o f ca su a ls
who perform s e r v ic e s ou tsid e the course of. an employer1s trad e or
b u sin e ss. I t should be noted -that under such a . r u l e , as under e x i s t - ■
ing law, some o cca sio n a l employers, may n o t know whether to withhold
tax u n til a f t e r an employee’ s s e r v ic e s h av e'been term in ated .

- lb w

At the end o f e^ch 'qu arter,' the employer would f i l e a ta x re tu rn
id e n t ic a l w ith the summary (upper) p o r t!a ft-o f the p re se n t Form S S - la ,
to which he would atta ch - a l l the s lip s ' taken from the hooks o f h is
employees. Large employers, and’ o th e rs who .keep good re c o rd s , upon
proper a p p lica tio n , to the Commissioner, would he p erm itted to dispense
w ith th is .p r o c e d u r e - and would -rep o rt the wages o f t h e ir employees in
the same .manner a s under the p re s e n t re p o rtin g system. Such employers,
however,- would have tor advise t h e ir employees th a t the Commissioner o f
I n te r n a l Revenue has s p e c i f i c a l l y waived the requirem ent o f wage e n tr ie s
in employees5 hooks.
While no f i n a l d eterm in atio n can he made a t t h is time a s to the
e x te n t o f coverage which might he o b ta in a b le under P la n I I , th e p la n
a s p resen ted contem plates the e x c lu s io n o f (1 ) nonhusiness connected
s e r v ic e s o f c h ild re n under the age o f l 6 , and (2 ) the s e r v ic e s o f any
employee who works fo r the p a r t ic u la r employer l e s s than th re e days in
any two co n secu tiv e calen d ar months provided the p a r t ic u la r employer
employed no o th er covered workers during the calen d ar q u a rte r. 1 /
The main fe a tu re o f t h is p la n l i e s in the f a c t th a t i t would enable
many a g r ic u ltu r a l and dom estic workers ( p a r t ic u la r ly casu al w orkers) to
b rin g t h e ir i n t e r e s t in t h e ir own s e c u r ity to h ear much more e f f e c t i v e l y
than under P la n I on employer compliance w ith the program. Employers
u sin g the h o o k -retu rn system would continue to he re sp o n sib le f o r f i l i n g
re p o rts and w ithholding and paying ta x es a s under P la n I , hut t h e ir
employees would have a g r e a te r opportu nity to check employer compliance by
in s i s t i n g upon proper e n tr ie s b ein g made in t h e ir wage hooks.
The h o o k -retu rn p la n , g iv en adequate employee co o p eratio n , would
f a c i l i t a t e the ta s k o f most employers because the d etachable wage s lip s
in the employees’ hooks would enable ¿mployers to re p o rt th e names,
account numbers £nd wages o f t h e ir employees w ith the q u a rte rly tax
re tu rn without e s ta b lis h in g a sep a ra te reco rd in g system fo r th a t purpose.
The p re p a ra tio n of t h e ir q u a rte r ly re p o rts would be p a r t ly accom plished
by the detachment o f the wage s lip s and would not re q u ire thé tr a n s c r ip ­
tio n o f wage d a ta from o f f ic e reco rd s to s p e c ia l re p o rtin g ' forms.
In addition, this mechanism would minimize the likelihood of errors in
reporting employees’ names or account numbers, since employers would not
be required to make such entries on wage reports. An offsetting con­
sideration from the viewpoint of employers is their being required to
handle wage books and tp make entries into them under difficult 'conditions,
1/ The 3-day e x c lu s io n .ru le i s designed to .elim in a te the -tax and

r—
~
re p o rtin g burden o f the employer in those ca se s where employment i s
ca su a l and o f b r i e f d u ra tio n , and where both the ta x and wage c r e d it
are l i k e l y to be in s ig n if ie a n t *
;■

- 15 -

72

as in the case o f payments to farm la b o r in ^the f i e l d . In a d d itio n , .some
employers who now keep complete reco rd s o f wage payment's may s u ffe r some
inconvenience in having to make e n t r ie s in the wage hooks. 1 /
In a ffo rd in g employees an opportunity to su pervise thé coèmïianfeè
of employers w ith th e program a f f e c t in g t h e i r own old-agé s e c u r ity , t h is
plan would enable employees to safeguard t h e ir in t e r e s t in the program
even during the p erio d when the payment o f b e n e f it s 'appears t o ’ be remote^ ‘
The advantage o f P la n I I from the p o in t o f view o f the Government
apart from coverage, i s the a id to enforcem ent r e s u lt in g from employee
p a r tic ip a tio n in the system and from the m echanical a id s provided th e v
employer. These g a in s would be secured a t the expense of" some departure
from p re sen t procedure." While the b a s ic elem ents o f employèr w ithholding
and re p o rtin g o f ta x e s and wages would be r e ta in e d , th e '’procedures now_
follow ed by em ployers, employées, and the .S o c ia l S e c u r ity A d m in istratio n
would;be subst a n t i â l l y changed. •The wage s l i p s might be e s p e c ia lly
troublesome to riro ce ss, as',was the case when the s o c ia l s e c u r ity program
was f i r s t in s t it u t e d and s lip s were used,- bu t 'the number o f such s lip s
would be f a r l e s s and the ‘P ro c e ssin g step s would be f a r sim pler than1
, ,
under the e a r ly system . The wage book mechanism would be c o s tly and the.
exten sio n o f coverage to includ e workers w ith sm all eabnings might re q u ire
many re tu rn s showing ta x l i a b i l i t y l e s s than the expense o f p ro ce ssin g the
re tu rn s. The value of the enforcem ent a id s in h é r e n t- in thé employees’
p a r tic ip a tio n in the program would be. reduced t o ' the e x te n t th a t th e re ,
i s employee r e s is ta n c e to P re se n tin g th ese bpoks to 'em p lo y ers every p a y .,
day, to f i l i n g tim e ly a p p lic a tio n s f o r now wage books, and to retu rn in g
th e ir old books to the S o c ia l S e c u r ity A d m in istratio n on schedule.. The
u nw illingness o f employees to p r e s s t h e ir employers t'o re p o rt wage ppy- '
ments which would re v e a l Income ta x delinquency, and the r i s k o f
jeop ard izin g t h e i r own ‘jo b s by re p o rtin g d elin q u en t employers', would
co n trib u te to" the re lu c ta n ce o f employees to e x p lo it the advantages
inh eren t in the proposed mechanism. •Moreover, sin ce the- employer would,
not be requ ired to r e ta ip a, copy o f-th e q u a r te r ly wage 'record o f e??.ch .
employee (althou g h he would r e t a in a copy-of h is q u a rterly , ta x r e tu r n ’ .
showing the t o t a l wages’ duripg th e ..p e r i o d ) f i e l d in v e s tig a tio n would
in some cases be hampered. .
'
'.
1 / Sin ce the- e x c lu s io n under* the p lan might- re q u ire ¿n employer to
w ait fo r th re e days b e fo re determ ining whether his-w age payments are,
ta x a b le , ca se s may a r i s e , a s they do upder present"’ law i n ’ connection
with non-bu siness ca su a l w orkers, where an' employer may not know
whether to w ithhold ta x u n t i l a f t e r an employee’ s s e r v ic e s have been
term inated.
’ .
"
*;

t

• ~

•

3*

16

-

Flan XIÌ. - Stamp system

Plan XIX involves the payment of social security tax through a stamp
system. But as in the:case of Plan II, it contemplates the use of the
present reporting system in that'arèa of agricultural and domestic employ-,
ment where it is practicable from thé viewpoint of the employer and thej
administrative authorities. Prior to 19^-0 operators of packing and
processing riants were covered by the present reporting system and in
many Cases make similar reports at present to State agencies. With the
coverage of agricultural employment, these \as well as some other
catagories. of employers could readily operate with quarterly reports*
It would be possible to develop a definition of the tynes of employers
who should report their wage -naynents in the same way as ermi oyer s in
commerce- and industry.
In addition, other employers vnuld unon applica­
tion to the- Commissioner be permitted to use the present reporting system.
The distinction between employers who would be required to use the present
reporting system ;and those who would be required to us® the stamp plan
would need to be left to administrative' determination on the basis of chang­
ing experience.
The rules governing the choice Of reporting methods
would have to be framed in specific terms so that employers and their
employees could readily determine which method- armlies.
In those areas of'agricultural and domestic employment which, are,
not covered by the present system, the stamp plan would apply;
The social .
security tax would be p a i d 1through the purchase of stamps by the .employer
and his affixing-then to the employee 1s stamp book.
The stamps
accumulated in this book would Constitute thè employee's working re còrd 1'
during the period the book is valid. When paying wages, the employer ;
would withhold the •employee 's tax arid-affix and cancel stamps in ah
amount equivalent, to the sun of the employer's and the employee'q tax.
Each agricultural. and‘domestic employee would obtain a social
security.account number and a stamp book from the Social Security
Administration.-' The -stamp books, valid for six months, would be Pre­
sented to the employer for affixing the appropriate stamps at the tine
wages are paid. Each stamp book would contain a detachable form to be
mailed by the employees to the Social Security Administration shortly
before the end of the 6—month period, applying for new books and listing.
their current -addresses*- It•would also contain space on which an
I
employee would enter the name and address of any employer who failed to
affix stamps, together with the amount and date of wage payments* Upon
receipt of. the employee*.s application, the Social Security Administration
would issue a new book. ; At the close of éach 6—month "neriod, the
employee would send his old book to the Social Security Administration
for posting and other processing*

>

73
- 17 -

On p resen tatio ft. o f completed a p p lic a tio n form s, employers would _
purchase s o c ia l' s e c u r ity stamps., a v a ila b le in s u ita b le denom inations, from
p o st o f f i c e s , r u r a l m ail c a r r i e r s , and c o lle c t o r s o f in t e r n a l revenue»
In the case mf employees who f a i l to p re sen t t h e i r stamp hooks, employers
would he req u ired '-to re p o rt on.„prescribed forms the employees account
numbers, names’and‘wages, ' an d ,to a ffix -.th e n ecessa ry stamps to th a t form .
The stamp p la n would p r o v id e 'p o te n tia lly complete coverage f o r a l l
a g r ic u ltu r a l and dom estic w orkers. . I t would abandon the p e r io d ic employer“
G overnm ent,relationship in h ere n t in the p resen t, re p o rtin g system , and
would r e ly .fo r enforcem ent p r in c ip a lly , on the w illin g n e s s o f the employer
to comply .-and on th e s e l f - i n t e r e s t o f the employee in p o lic in g the system.
Under the p la n , employers would not have to keep any s p e c ia l wagere co rd s, pr make out any ta x re tu rn s o th er than a r e q u is it io n form in
purchasing stamps. The stamps would a lso serve a s the employee s r e c e ip t .
However, employers would fin d i t in con v en ien t to purchase and'keep on
hand an adequate, supply o f stamps, to p r o c e s s . stamps by a f f ix in g and" ' .
c a n c e llin g them ( sometimes under f ie ld , c o n d itio n s ), and to handle s o ile
and m u tilated books. Employers would a ls o fin d i t d i f f i c u l t to., make wage
re p o rts where the employee f a i l e d to p re se n t h is-b o o k f o r the in s e r tio n
of stamps.

' I'M • ' '

•

•*

. ' •

:: V:

Ip :

:

1

-*

‘ Employees would be a ffo rd ed an opportu nity to take a d i r e c t , pa p t :
in safeguarding t h e ir o ld —age s e c u r ity i n t e r e s t s , but by the same tok en,
employees would -find i f r e l a t i v e l y easy t o - a l t e r t h e i r wage record s by
the fr a u d u le n t.s a le or pu rch ase of stamps, th ere b y e it h e r s a c r i f i c i n g
th e ir o ld -ag e1 s e c u r ity i n t e r e s t fop. immediate. g a in s , or o b ta in in g h ig h er
old-age b e r ie fits than i s planned.- I t should b e ; n o te d , however, t h a t - i n
order to in c r e a s e t h e ir b e n e f it s to any g re a t e x te n t, younger employees
would have to . a l t e r t h e i r wage record -’over a long p erio d o f tim e. As an
a d d itio n a l safegu ard / the employee. would be required- to 's ig n * under
p e n a lt ie s o f p e r ju r y , a "V o rk er’ s D e c la r a tio n ” upon subm ission of h is
book to the e f f e c t th a t th e stamps in the book r e f l e c t bona f id e employ­
ment. The lo s s o f stamp books would p e n a liz e em ployees,•'u n le ss th ey
could p re se n t a s a t is f a c t o r y r e c o n s tr u c tio n of t h e ir ea rn in g s record *
^rom the viewpoint- of the Government, this plan offers an opportunity
to. place the tax collections on a .pay—as—you—go basis, through the pur­
chase of stamps in amounts related to current operations. A t the same
time, it would minimize the possibility of erroneous reporting of
employees* namesand account numbers, ' These gains would be secured,
however,- .by a tax collection and wage reporting system distinctly

different from the,present
along

side

s y s t e m , w h i c h .w o u l d n e e d t ° * e

red

o f t h e p r e s e n t .s y s t e m a n d

auditing and

spot checking.

ridwe--

However,

.

^

n o n - r e p o r t i n g or e r r o n e o u s r^ o r t i " ! t^ n^ f ^
•purchase a p p l i c a t i o n for m s , h y a s c e r t a i n i n g

^

means o f tho employer's
r
*

he is p u r c h a s i n g
effective public

stamps in a m o u n t s
r s ' a n f e ^ y e e s of the
r e l a t i o n s p r o g r a m d e s i g n e d to ..inform entnlo
salutarv effects.
'o b j e c t ! v o s of. the. e x t e n d e d p r o g r a m w o u l d a l s o h a v e saiuiar.
. ¿is

m a n

would place heavy reliance

'

'w h o s o j i n t e r e s t i n e v e n t u a l b e n e f i t s ^
%
^
s^ t e n t i L t h e m to
t h e i r r e s i s t a n c e to. c a r r y i n g t h e .s t a m p _ h o o k s , p r e ^ n t i g ^
.^ t ^
employers at

th e ..proper t i m e a n d p r o v i d i n g - t h e

tion w i t h the

necessary

i n f o r m a t i o n to o b t a i n n . w

e m p l o y e e s m a y prefer, t o f o r e g o

tra.

So<dal ;
Se,
•

-hnneftts

eventual old-age

¿i/reveal

rather than disclose information tp
t t e i ^ j o b s bv'Reporting delinquent
■income-tax delinquency. or j e o p a r d i s e t h e i r ^ S ^ r e n o r t i n g ^
ernnloyers a n d r e d u c e the c o n t e n t s o f t h e i r pa,
-.lacad h v ‘
- o f t h e e m p l o y e e tax.
T h i s m a y h e o f f s e t b y t h e v a l u e m a c e d , h,
e m p l o y e e s o n i n s u r a n c e a g a i n s t c u r r e n t r i s k s a n d the p r o t e c t i o n th
g i v e n to t h e i r d e p e n d e n t s .

the

,

-

-

, .

F i n a l l y , u s e o f th e s t a m p p l a n w o u l d i m P a i r
“w o r k c l a u s e “ , 1 / s i n c e an, e ^ l o y e o d e . i r i ^

^ n c e m

e a r n i n g s i n e x c e s s o f th e a l l o w a b l e m a x i m u m , i
tmimdu^l ’
a cccUftt
benefits
c o u l d ' p r e v e n t the p o s t i n g of w a g e s to h i s individui-l
.
b e f a l l i n g 0 to s u b m i t h i s s t a m p h o o k to t h e S o c i a l S e c u r i t y A d m i n i s t r a ­
tion?

Sfs

difficulty would he mitigated-to

th.o e x t e n t

:

that

S o c i a l S e c u r i t y A d m i n i s t r a t i o n found..it p r a c t i c a b i
- _P
I S d S l s
i n b t n e f i t stat u s ; w h o . h a v e f a i l e d « « * * ■ * * *
o r h a y i n g received,
C.

sta m p hooks' failed.-to

Selected administrative
1.

W i t h r e s p e c t ' t o ;the

are

1/ The

;
/>

*

s e r v i c e s o f e m r l o y e e s p e r f o r m e d -for h u s b a n d ^
some, d i f f i c u l t y m i g h t h e

i d e n t i t y of the employer.

encoun e
v

“w o r t c l a u s e “ d i s q u a l i f i e s

who during a given month earns more..than SI »9?
Hnderthe^existing system, the Social Security
regular reports of
the

~ .. .:

issues

living-together,

in d e t e r m i n i n g t h e

'?***

r e t u r n them,

.- I d e n t i f i c a t i o n - o f e m p l o y e r

and wife who

■hnnk«*

nw o r k c l a u s e 1*'.

covered employment whi ch

■■

permits

. -¿.
e n f - f e e m e n t of

- 19 -

--- — t,TKilé'~ in the "ordinary.. cn se .the re ~woj£fcd -be~no -que st ion as -to-the—
liability of the husband as the'principal -éi^ìb^é'r *. the ré' might be a
number of border-line cases where the service.inured solely*.to the
wife 1 s benefit, ..was'outside the cdtegoirf Pf 'heedssities,'-aid .was-paid. .
for by tèe wife out of her own funds* In stidh''Cases.', it would-not be •
•nroner to prescribe that .the; husband is liable as 'employer* •
: >•

-

,■

?....... j. . . . . . . f ,

... ■

The possibility of defining nemployérr,'”arbitrarÌly"to include .-both
spouses jointly in all of such’ cases is likewise imnfa,dtica.1 'because it
would create a new employing entity separate ’grid.’distinct .from either
spouse and would thereby prevent one spousói' who has mother employees ^f,
his own, from including his domestic or farm’ employees on the same return.
In the light of these difficulties, it appears that until adequate experience is acquired on this matter the problem might best'be solved ■by way of a, ruling (rather than a statute) raising a. rebuttable
presumption that the husband (living with his wife) is the employer •
in all cases of agricultural or domestic service performed for either,
;
or both, of them.
‘
•
' 2.

Identification of employees in,agriculture

The eleven-year old problem of determing who are employees would be
greatl?r intensified in the field’of agricultural labor which abounds in
workers, such as sharecroppers, labor contractors,' and heads of family
groups, whose classification falls into the twilight zone' between the
concents of ’’employee” and ”independent contractor.”
Without laboring the characteristics of such workers concerning-whom
"there afe- relat ivelyllt tl e available data, it"a.ppears ad vi sab he 'not -.t
~
attempt at this time to provide any special statutory definition.of the ■
term ’’employee” as applied solely to the field of agriculture. Until me reexperience is acquired with respect to the coverage of such workers, this.problem might “best be solved by way of rulings or regulatory presumptions'.
3*

Payments in kind

A substantial number of domestic-and agricultural workers receive .
part of their remuneration by way of •meals, -,lodging 'and .other perquisites'’.
Such income in kind ought'to be -included in ’’wages” for purposes of -tax
as well as credits under OASI to- the some extent' that meals,;'lodging''hiid
other perquisites, are considered* under existing coverage'»'. In other words,
no arbitrary table or series of tables should be established either in the;
C^de or Regulations, and values Should-be determined as at" present'on
the basis of a rebuttable presumption that the employer may use* tables. -■
of reasonable values established b y State age'ncies for each locality.a
If State tables.,are found inadequate, an acceptable alternative would"
be the use of-tables of presumptive values approved by the Bureau of !
Internal Revenue and the Social Security Administration'.
.......
1

-

___________ ; '

1

20

III.:; PLAN ITCH THE C0FE3A0-E OF THE SSLF-SMPLOYED■ ........

The plan for the inclusion of the self-employed in the .old-age
insurance program involves a departure from the mechanism now employed
in that program, under which employers report the wage records of
their employees and make quarterly7- payments covering "both their own
tax and the taxes of their employees which are i^ithheld from wages.
Because of the inapplicability of the collect ion-rat-source mechanism,
the pro-nosed plan relies on the .introduction of a. self-reporting system. So If-’employed persons would he required to file social security
tax returns covering their self—employment income and to pay the tax
directly io the collectors of internal revenue, very much as taxpayers
now file income tax^returns.
The plan would associate the collection *
of the 1 social security tax with the. income tax.
The degree 'of coverage under a plan of this sort is a function
of the size of the exemption in relation to the levels of income.
The higher the exemption, the less the coverage, and vice versa.
The determination of the size of the exemption is a. policy decision,
which should he made in the light of the. implications of an exemption
of any given size on the cost and-other aspects of administration-on
the one hand, and the degree of coverage on the other. The extent -to
which complete coverage can he approached is limited only hv the
G-overnraent1s readiness to undertake the administrative burde-ns involved.
In the plan here described, the point of departure is the minimum
exemption now allowed under the .Federal income tax.

The self-employed constitute a heterogeneous group of about
The largest single occupational. class is -composed
__p f farm, op c rat or s , representing about half of the total, number of selfemployed persons.
The remainder, the non—agricultural self-ernnloyed,
are scattered through many industries.
Over one—third were concentrated
in retail trade, according to the 19^-0 Census. ■ More than a fifth were
in service industries. The professions and the construction industry
each accounted for about one-tenth of the urban self-employed.;

11 million persons.

Among the urban self-^ernnloyed it is estimated that before the wax
about 9*4- percent had a gross income of $500 or more, and about threefourths had a net income of at least $500. The level of income among
the 5*5 million rural self-employed was substantially lower.- Over half
of the self-employed farm operators, for example, had an output,
including products- raised for home use, valued at less than $750
1939»
Many of these farm operators were not entirely dependent on their farm
operations. A large proportion worked 100 clays or more off the farm;
many were'over age 65 and probably represented xetired farm operators.
About 3®7 n illi°n persons were wholly or principally dependent on their
farm operations.
Of these about 1.2 million were in the ^poverty” group,
each with a gross farm output valued at less than $750- There-were only
about 5 0 ,0 0 0 farm operators with a product valued at $ 1 0 ,0 0 0 or more.

75
-

21

-

About two-thirds of the farm operators in 19^0 were either part
or full owners of their farms# £nong those operating as tenants
(excluding sharecrop-ners) nearly half were on a share he pis*
Indepen­
dent farm operators were almost entirely men, with a median age of
^9*3 years. Over four-fifths of the farm operators were married*
The plan for the coverage of the self-employed described below
calls for the imposition of a tax on self-employed individuals measured
by selected items of income reported for income tax purposes* * It provides
for the segregation of that part of total income which is most nearly
comparable to wage income and analogous to earned income#
Individuals
affected, limited to those whose self—employment income for the taxable
year exceeds the exemption, would file an annual self—employment tax
return and pay a self-employment tax at the sane tine as they filed their
income tax return and pa,id their income tax# The maximum amount of
taxable self-employment income for the year would be $ 3 ,0 0 0 , less such
amounts of wages as have been subject to social security tax withholding
by the employer. 1/ The base for the Proposed self-employment tax would
be derived from items of income reported on the income tax return, and
this would facilitate appreciably tax administration and taxpayer
compliance* Armroxinatien of a tax base as nearly comparable, to that
employed for wage earners would be achieved b y eliminating from the
base insofar as practicable those items of income which are clearly
unearned, with due consideration for administrative practicability.
The Bureau of Internal Revenue would collect the tax.and transmit the
relevant income information to the Social Security Administration for
posting and crediting to the individual’s old-age insurance account#
A*

The tax base

The key to the definition of the tax base for the purpose of an
old-age^insurance tax imposed on the self-employed is the isolation of
earned income from total self-enploynent income.
This is essential to
place the self-qmployed on a par with recipients of wages.
More important,
is essential to the creation of a system of insurance sensitive to
the timing of retirement and the amount of the income loss resulting from
retirement.
.

~l ^roughout this section reference is made to taxable' self-employment
income of $3 ,0 0 0 , to accord with the corresponding provision under
present law.
This study has not considered the case for raising the
amount of taxable wages and the reference to $ 3 ,0 0 0 is not intended
to prejudge that issue.

~

-

'22

-

The existing socini1'slcüritÿProgram is designed to compensate-.. ■
individuals and their >i,4jâîîiérs!
'the loss .df wage income incident to
death or retirementv '-Œhfà requires ;the determination of ^income from
personal' services?.' In thd ease "of‘^gë" earner s».the determination is
generally .éiiïîpl-e;- it ■tfoffësnb'hds to ;trhe-contents of the pay envelope.
In the case of self-employed persons, however, it..presents difficulties
because 'theHr .
‘1 heurté- is •generally ;W mixture of' faages .fqç personal ...
service-and erf return oh invested 'capital.; For purposes of the old-age
insurance t a x a i t is necessary to' identify as nearly as possible, these- ,
two categories of "incdme,‘to segregate' thp income attribuiable,to
personal services,- which' presunably stopSlat death or,'rotire^ent^.
Inthe absence of" sUch a segregation, those ^Self-employed persons whose
income includes an element of return, fro rip capital, which,- continues after
their retirement could either be required;to/continue to nay contribu­
tions and fail to qualify for benefits after they retired 'or a.-test of r retirement•*independent of income could be, prescribed.
..... . ¡.v ,
„

v

.

*■ .

..

,1 4-

inasmuch-as tax practice has not yet developed.. an„ adequate?- '
procedure tfor isolating earned income from investment income applicable-,
to the self-employed, the segregation for old-age insurance purposes •* ■
must be- made -'arbitrarily. Such segregation can be made by the inclusion
and exclusion of broad categories of income received by individuals from particular sources and already reported for income tax -purposes,
xhis procedure, described below, provides a reasonably satisfactory
working basiis for purposes of the old-age insurance tax. ,/
In connection with the coverage of the self—employed, special
consideration may have to be given to the scope and application of the
work clause. Retirement among the self-employed is a vague concent.
Many self-employed persons never actually retire; they work a
diminishing number'of hours or handle a diminishing number of cases*
The practice.among lawyers to accept ;an occasional special, case at-an
age when industrial employment would have prescribed retirement,- or
the tendency of shopkeepers to_continue making token, appearances *nn thepremises after* they have yielded management to their successors, is
illustrative.. A related consideration is the practice among wage earners
to enter self-emologment after being retired as employees. This suggests
that a modification of the present work clause is necessary to avoid^
barring certain self-employed persons from qualifying for benefits even'
if they were/-accorded coverage/' One stich modification might be
•/•<.>..
elimination pf* the wo'rk clause for all persons after they reach age,.'jrO* .~'

76
- 23
1.

P r ofits from trade or business '

1 '

•’Profits iron trade or 'business.” are now reported as a separate item
on the income tax return* ..Such profit s' are generally derived in connec­
tion with the, application of personal* services to* an enterprise* They ore
normally "work-connected” and, therefore, should he included in the tax
base for the self-employment tax* In the case' of those filing income tax
returns, this item may he transferred from .the income tax return for
purposes of the self-employment tax return.
The determination of what
constitutes a trade-, or business for purposes of the self-emrioyment tax
will raise difficulties in: some cases which do not-need to'he resolved
for purposes of the. income tax and, as many taxation problems) will have
to he settled by administrative decision.
2* . Interest, dividend .and royalty-''-income
Interest and d.ividends would he excluded from the proposed tax
base because normally they constitute investment income* However, in
many cases.such items of income are ”work-connected” and analogous to
the earnings of an ordinary business enterprise, as1
.-for example, in
the case of small loan operators, security dealers, and'pawnbrokers. •
Moreover, virtually any enterprise may receive interest on its accounts
receivable or on notes which it holds* To the extent, therefore, that
interest or dividends are trade or business income, provision would, be
made for including such income in the self-employment tax *ba,se.
What has been said of interest and. dividend’income applies equally
to royalty, income, and to the extent that such income-is derived, from a
trade or busine.ss, it would he- included in,the self—employment tax base.
The proposed differentiation of interest,'dividend and, royalty
income as between business receipts and. Personal investment income may
be significant in .only a relatively few casos. Ohly when an individual's
self-employment income from other sources together with covered wages is
loss than $3 ,0 0 0 would, the distinct Ion come into play.
If his income
from these other sources amounts to at least $ 3 »0 0 0 , the maximum tax
base, there will he no need for making the allocation because call further
amounts of income will automatically fall outside the self-employment
tax b a se .
3*

Rents

As in the case of dividend, interest and royalty income, rents are
requently attributable, in varying degrees, to the personal services of
a proprietors.
Some owners spend considerable,time in making repairs
an i. otherwise maintaining and. managing their rented property. Accordingly
would, seem logical to apply the same treatment to this item of income
as s con^eilplated in the case of dividends, interest and royalties.

Efforts were nade to distinguish between that rental income which
is predominantly investment income and that which is substantially workconnected. ;;The use of the ’’trade or business”,yardstick, which is
adequatevjLn the casé of dividends, interest, and-royalties» seemed too
comprehensive when applied to rents in t.he light of-recent court
decisions holding that real estate rentals, even in the case of a single
residence, •are 'now considered income from the, conduct of a trade or business-under the Internal Revenue Code'. .
•
■■The: foregoing considerations suggest that the possibility of
formulating a practicable rule for the administration of the' desired
distinction in the case of real estate rents was:extremely remote.
Of the two remaining alternatives, either to include or to exclude all
such rents from the self-employment tax base, the latter:appears to
b.e preferable.
In the average case, real estate rents are essentially
a return on capital which, presumably, will continue after the
proprietor’s retirement.
■
It is’ not clear whether a statutory exclusion of "rentals from real
property” would necessarily apply to boarding houses and hotels, If is
believed, however* that the'receipts in those cases'might be properly
classified b y w a y Of regulations as falling outside the excluded Category
v.

Capital gai ns" and annuities

’"

The proposed tax base excludes all capital gains (and losses) since
this item/is- clearly hot earned income. This may exclude some item's
of work-connected'-income, aspiri the case of a trader whose profits take
the form of.'capital gains. However, if allowance were made for such
exceptions, it would enta.il compiications to a degree doomed highly
undesirable.. ■Cains and losses from the sale or exchange of property
other than capital assets which is used in.the taxpayer’s trade or "
business, also áre to be excluded from the tax base. Annuities would
be similarly excluded.

5*

Ret operating losses

*

/. p

; .p-

With a view to averaging incomes in good arid bad years, the incometax allows operating losses sustained in other years to be deducted in
arriving at net income. This deduction would not be permitted for social
security tax purposes.
If the averaging of income achieved by the netoperating loss provision were applied for purposes of the self-ornnloyment
tax, the self-employed person would be treated inequitably.
He would not
only fail to receive.credit in his social security account for thè year
in which he sustained the loss, but his credit (and tax) for the year in
which he had a.profit would also be reduced by virtue of that loss*

- 25 -

77

To eliminate the net operating loss from self-employment income,
the income tax’return would "be altered* This item would he removed
from Schedule-'C a n d :à new schedule would he, inserted on the, return to ~~~
provide for the reporting of the net operating loas deduction.
6«

Partnership profits

The rules described above .for the inclusion and exclusion of items
of income would apply to income derived by àn individual from a partner­
ship, syndicate, and' joint venture.
This would, require some changes
in the partnership income tax return (Form IO 65 )- ;
7*

Adjustment for taxable wages

In .some casés, a self-employed individual may also be employed
as a wage earner in an industry covered' by the existing old-age
insurance program.
It would be necessary therefore to provide for
an adjustment of self-remployment income in order that the total taxable
income during-the year, including covered wages, did not exceed $3*0Q0.
In the absence- of such an adjustment, individuals might be taxed on
more than $ 3 »000 in any year but receive benefits based on earnings of
no more than that amount.
It should be noted that this coordination between the proposed
tax on self-employment income and the Federal Insurance Contributions
Act is not extended to other Federal retirement programs. Unless some
action is taken to prevent duplication, it will be possible for a selfemployed person to obtain credit and pay contributions toward railroad
retirement benefits or civil service retirement benefits at the same
time as he pays.tax and obtains credit for his self-employment income.
Similar duplication is possible now, however, in the case of wage
earners.
,; ■
B.

Exemption from tax

The existing old-age Insurance program applies to all wage earners
in’ covered industry regardless of how small their individual wages may
be. Under the income tax,’ the ‘taxpayer is allowed a ¿5^0 exemption
and a. similar exemption for each denendent:member of his family.
In
fitting the proposed old-age insurance plan for the self-employed to the
income tax, it would not be appropriate to carry over -the present income
tax exemptions.
If. this were done, a large number of .self-employed
persons would be excluded from the program.
The other extreme, covering
all self-employed persons no matter how small their self-employment
income, would likewise be impractical. Although the present tax on wages
for old-age insurance applies to more than U 5 million workers, use of the
withholding mechanism makes it possible to collect taxes from these people
t>y dealing with only about 3-1/2 million employers. A solution lies
somewhere between these two extremes and should be determined "by
"balancing administrative costs and taxpayers’ compliance difficulties
against the desirability of the broadest possible coverage«

- 26 A choice \irhich readily suggests itself is the adoption of a $500
exemption per taxpayer, that is, to exclude from the tax and from
coverage those individuals with self—employment income aggregating
“less than $500 (regardless of the size of their, family). It will "be
recalled that for two years during the war, the normal tax provided -p
for an exemption of this amount. ~ Such a provision/would bring- under
the system an estimated 8 .9 million persons in 19 ^ 7 .* The Principal
objection to an exclusion orovisioh of $500 self-employment .income is
that, as compared with an-alternative discussed below, it would exclude
approximately 1 .6 million persons who are most in need of ¡ol^-age •
,
security. This group consists principally of farm operators, but also
includes independent workers in urban areas.
The number excluded ■■■
would, vary, with the general- level of business activity, and in a year
such as 1939 might reach-2 -million. Another disadvantage of the $500
exclusion is that in a number of cases the 1self“employment tax will
not be collected, on self—employment income"which will have been reported
for income tax purposes. For example, a wage earner.with a total income
of $ 2 ,5 0 0 who reports two or three hundred dollars of self—employment
income for income tax purposes would not be required to file a self— -,
employment tax return because of the $500 exclusion, ’-fhile -the wage
earner will generally be in the social, security system, the collection
of self-employment tax on his additional earnings, and the additional»
credit resulting therefrom, would constitute little additional burden
to the administrative authorities.
An alternative exclusion might be $200 of self-employment income,
with a proviso that the self-employed person must have at least $500
of gross income (i.e., is required to file an income tax return)•
This would bring under the system an estimated 10.5 million persons.
However, in the view of the tax administrative authorities, such an.
exemption would raise a.number of serious problems.
It would .involve
the collection of tax from many individuals who are not-liable, rfor ■
Income' tax because of personal exemptions and cred.its for dependents,
and who characteristically do not file income tax returns, although
their income exceeds the amount established as the filing requirement.
Enforcement of the. self-e mol cyme nt tax on such r>ersons would require
additional administractive -personnel, at a cost that would be relatively
high in relation to the additional taxes collected. The extent, of such
added costs would vary with the interest of these individuals in acquiring
coverage. Although the amount of tax due would be small under the lower
exemption, many would be unable to pay it, notwithstanding the -government’s
efforts to collect .it. Finally, it "may be noted that the. lower exemption
would enable individuals who have no self-employment income -to acquire
coverage at a very low cost merely by reporting $200 of.such income.
So
long as coverage is not complete, there will be an incentive for persons

-"27 outside the system to report fictitious- income. However, as the coverage
of the system, approaches connleteness vepy few people would need to
'
pesort to this device since they would have coverage on the basis of
other employment...x Although some safeguards may be erected, it would"
be impractical for the administrative authorities to -n-revent all ':1
reporting of fictitious self-employment income * These-considerations
also apply to some extent in connection with -the higher exemption, but
the magnitudes involved would be different.
vs •••-. a •
As stated earlier«, the degree of. eo.verage under the -social security
system is largely a Question of „administrative, costs. -Substantial
extension of coverage is attainable- -provided only that additional .
■ ■
personnel is made pvailable. However.» the determination of the extent '
of additional coverage is a matter for Congressional determination in
the light of administrative cost on the one hand and social and economic
desirability on the other. •
C.

Tax rate
_ Th;e old-age and survivors insurance urogram is now financed by a

2 percent tax on wages, one-half imposed on employees and one-half on
employers.
In the case of.the self-employed,, there is no enployee©mployer relationship, and it is necessary to determine whether the
tax should be imposed at. .the employee rate of 1 percent, .the combined
rate of 2 percent, or at some, compromise rate. The decision involves
equity and administrative considerations.
Although to date public policy on financing the social security
program has not fully crystallized, the Congress has determined, with
respect to existing coverage, that 2 percent of covered earnings shall
be collected from earmarked taxes.
Since the-- proposed plan of coverage,
as indicated at the outset of this report, is based on the assumption
that it must fit into the,existing social security framework, it"follows
tnat the revenue goal of the nlan should be 2 percent of self-employment
income.
If the pro-nosed tax falls short of this goal, it is because
considerations other than financing are relevant to the -problem.
From an economic and equity viewpoint,- it is desirable that social
security taxes should not put an employer at an advantage ;compared with
a comueting self-employed rerson. For should it alter the balance of
1actors which determine whether, an individual becomes or remains a
se f-employed -person rather than an employee. However, the effects of
cither the -present social security taxes nor of the pro-nosed selfernnloyment taxes can be assessed with sufficient precision to determine
ow the relative -no sit ion of the various groups would be changed -by
thpS^-?
* ■^ie economic effects of social security toxes de-nend upon
-irection and extent of shifting,
G-iven the great variety of-nreeconomic relationships, there can be no uniform pattern of
m g of the proposed self-employment tax. Part of the difficulty of

determining a tax rate for the self-employed lies in the fact that the
self-employed person presumably performs the economic ...functions of both the employee and the employer.
If we compare the self-employed person
in his role of businessman with the employer., of labor, we are led to the
conclusion that he should be subject to the equivalent of. the employer
tax. And if we compare the self-employed person in his role as worker
with an employee, we. are led to the conclusion that he should be subject
to equivalent of the employee tax.. And yet there is a lack cf realism
in attributing such a dual economic personality to all self-employed
persons. Very frequently the economic position of a self^-employed
person is. sp.^ much like that•of an employee that a distinction between
them can be drawn only on the most tenuous grounds. Because of the
heterogeneous composition of the self-employed groups, it would seem
desirable to levy a tax that is somewhere between the employee rate
and the combined employee-employer rate. !For example, the rate might
be 1 percent on the first &500 or $ 1 ,0 0 0 or some other specified
amount of self-employment income and 2 percent on the balance, if
Another equity consideration which tends to support a compromise
rate is the fact that t h e .employer tax is a deductible expense for income
tax purposes, while the proposed self-employment tax is not to be deductible
for income tax purposes.
The deductibility of the social security tax
insures that the employer, so long as he is subject to income tax, will
shift part of the social security tax to the (rovernment, if it is not
shifted elsewhere.
The self—employed will not have the opportunity to
shift part of the cost to the 0-overnment. in the form of -a lower income tax.
D.

Other considerations
1.

Joint returns

\It is contemplated that in the case of a joint income tax return
of a husband and wife, a self-employment tax return would be filed only
bjr the spouse having self—employment income.
If both spouses had such
income, however, each would report se3_f—employment income separately..

2.

Community property

At present the salary or wage income of a married couple in a
community-property State may not be arbitrarily.divided between the two
spouses'for purposes of the social security’.tax, although it may be
split between them for income tax purposes.
Only the- spouse earning the
salary pays social security tax, and he alone, receives credit toward •

17 If the present tax rates with respect to employment were increased,
simultaneous changes in the corresponding rates on self-employment
would also be increased.

79
- 29 -

social security ‘benefits- This principle would also le applied to selfemployment income. To depart- from it would provide some groups an
undue advantage and would distort the pattern o'f'benefit payments now in
the law. *o .adhéré to this •principle- involves some compliance problems.
However, the self-employment income to be Reported for self-employment
tax purposes must normally be determined before any allocation is'made
between the spouses for income ta.x*
"
It does not follow that a.husband and wife in a community—property
State could not each have self-employment income and acquire eligibility
for benefits in his own right. Each-spouse may indeed.be subject to
the self-employment tax because each has self—employment income*
The general rule suggested is that the income from a trade or
business shall be treated as the income of the spouse who has the.
management end control of the trade -or business irrespective of State
law. If both spouses have the management and control of the trade or
business then so much of the income as is attributable'to the services
or property of each spouse would be treated as the self—employment
income of that spouse, .This rule would be-applied in cases of joint
tenancies, tenancies by the entirety, and joint undertakings as well
as to community-property income.
3*

Partnerships

The ”management and control’* rule for allocating business income
between spouses would not disturb the allocations of income of a
genuine husband and wife partnership.
Such a partnership, if recognized
for income tax purposes, would be valid for social security tax purposes*
Accounting periods and methods
Income tax returns are sometimes filed on a fiscal year basis or
for part of a year.
Consequently, the self-employment tax would also
cover periods other than a full calendar year.' It would be necessaiy
nerefore for the Social Security Administration to make allocations"
0 i^ ° rne* *°r 'benefi‘t Purposes, to quarters within a calendar year
straddled b y a fiscal year return.
Similarly, it would be necessary for
©Social Security Administration to allow for the accumulation on selfemp oyment income credits on the basis of the Various accounting methods
se in the determination of taxable income' under the income tax, such,
in
' accrual> percentage of completion, crop, completed contract and
w i + w ! ? e: *
• TpTt "rear returns, present a problem in connection '
tb-t
e .S3,000 maximum tax-base.
In'order to obviate the Possibility
.lnd:3'Vid'aal
taxed in any year on more than $ 3 ,0 0 0 , the ^
J-imitation would be prorated for part year returns.

“ 30 r

5*

Exclusion of nonresident citizens» aliens» etc.

-

It is, of course, possible for nonresidents of the United States to
conduct- a trade or business here and to derive self—employment-income.
However, it is not conceived to he the function of the social security
program to provide retirement and survivors benefits to such individuals.
It is therefore contemplated to exclude from coverage nonresident aliens
and persons who are bona fide residents of a foreign country for the
entire taxable year.
There would also be excluded, from the tax base
income derived by a United States citizen from sources within a United
States possession if such income is not subject to the income tax* 1/
6.

Tax decisions to be binding for credit purposes

Since the self-employment tax is to be based, upon income reported
for income tax purposes, it follows that decisions as to what constitutes
taxable income, --or on the allowance and disallowance of certain items
of deduction, should be equally binding for both taxes.
It is also important that the decisions made for tax purposes
should be equally -applicable for purposes of crediting an individual’s
social security account. Otherwise, the Bureau of Internal Revenue may
rule one way on say, the deductibility of a given expenditure, while
the Social Security Administration may rule another way.
Such incon­
sistency may arise at present in connection with wage earners, because
each agency is empowered to place an independent construction on identical
statutory language. This is unsatisfactory now, but it would be:far worse
if a similar situation were to exist with respect to income tax concepts.
It is therefore suggested that the Social Security Administration be
specifically bound to adopt the decisions made by the Bureau of Internal
Revenue with respect to any problem arising under the self-employment tax
which might involve an interpretation of the income tax provisions of
the Code*..
...

1/ Section 251 of the Internal-Revenue Code provides for the
exclusion- from gross income of all the income derived from
sources outside the United States (and not received within the
United States) by a citizen who (l) derived at least- SO percent of
his gross income from sources within 0. possession of the United
States, and (2) derived at least 50 percent of his gross income
from the active conduct of a trade or business within a possession
of the United States.,
. '

7*

Reporting off self-employnent tax

As heretofore indicated, the self-emplcyment tax will he computed
generally on the basis of data also required for income tax purposes,
and it is contemplated that both taxes will be returned to the
collector of internal revenue at the same time.
The transfer of data
from the income tax form to the self-employment tax form and the
mechanics of computing the self-employment tax are illustrated by the
items and explanations set out in Appendix B.

- 32 APPENDIX A
DETAILED COMPARATIVE DESCRIPTION OP FLAKS FOR
AND DOMESTIC EMPLOYEES

rrrmM^foiFICPICULTURAL

1. _ MAILING-* PRINTING, AND OTHER
MECHANICAL OPERATIONS
Plan I
Present System
A,

’

?^an IIStamp System*

“Publicity and' initial
applications

Leaflets will "be dis­
tributed to all likely
agricultural and domestic
employers (approximately
10 million) outlining lia­
bility of employers und er
the new law and enclosing
post card applications
(similar to Form SS-U)
for employers * identifica­
tion numbers.
All agricultural and
domestic employers and
employees will be advised
by radio and through the
press relative to the
securing of social security
account numbers.
The employer applica­
tions will be preaddressed
to the Collectors of Internal
Revenue, and will disclose»
among other things, the
number of agricultural and
domestic employees on each
employ e r *s pay roll»
On receipt of such
applications, the collect­
ors will forward to the
employer a sufficient
number of applications
for employee social
security account number
(Form SS— 5)? for dis­
tribution to his employ­
ees, He will also
receive the number
assigned to himc(Form SS-6)
*

Plan II
,,
v.
Book-Return System* *

Same as Plan I

Same as Plan I,
except that there would
be no employer identi­
fication numbers.

Same as Plan I

Same as Plan I

Same as Plan I

Same as Plan I , except
that the employee application for an account number
would also constitute a'
request for a wage book*

Same as Plan 1 9
except that the employ*
36
application for an
account n u m b e r would .
also* constitute a ro*
quest for a stamp bon*»

Both Plans II and III contemplate that a number of large employers would
follow the procedures described in Plan 1»

81

— ^3
On receipt of the ap­
plication filed by an
employee, '
•the1Social- Secu­
rity Administration will
send hiiir a card bearing';
the social security
account 'number assigned '
to him»
É

Same as Plan I,
except that; the employee
would also bo sent a ;
wage, book«

Same as Plan I,
except that’ the employee
would also be sent a
stamp booko

Same as Plan I, but
in addition forms.,.would
be sent to the employer
once a' year (and upon
request) for use in case
an employee does not sub­
mit his wage book to the
employer»

No provision -for
quarterly tax returns*
Tax will be paid at the
time stamps are purchased
from post offices and
collectors officeso There
will be available at theso
offices special forms to
which to attach stamps,
in cases where the employee
fails to submit his stamp
book to the employer«

Toward the .end of
each year, the Social'
Security Administration
will issue a new wage
book to each employee*
Each book contains a
detachable application
for a now book, indicat­
ing the employee's cur­
rent address,

Same as Plan II,
except that a new stamp
book would be issued every
six months by the Social
Security Administration«

V-

Bo

Tax returns

Toward the close of
each calendar quarter a
tax return (Form 3S-la),
in duplicate, will be
mailed by the collector
to each employer« On
receipt of the tax re­
turn from the employer
the wage data schedules
will be detached by the
collectors and trans­
mitted to the Social
Security Administration
for posting of wage
credits to the accounts
of the employees listed«
C«

Periodic■issuance
of books
No provision

2o - EMPLOYERS1 BURDEN
Plan I
Present System

Plan II
Book-Return System

Plan III
Stamp System

General procedure
In addition to com­
puting and withholding
ihe employee1s tax and

In addition to com­
puting and withholding
the employees' tax and

In addition to com­
puting and withholding the
employees» tax and paying

paying a similar tax him­
self , the employer must
(1) apply for an identif­
ication number, (2) keep a
quarterly record of his
employees* names and
social security account
numbers as well as the
wages paid to each, (3)
on the basis of such
record, fill out a
Schedule showing the
necessary wage inform­
ation for each employee,.
(4) fill out a tax re­
turn showing total wages
paid and taxes due, and
(5) forwa rd the re turn,
the schedule and tax
remittance to the col­
lector within the month
following the end of
the quarter.

In the case of an
employee who does not
have an account number,
the employer must attach
to his return a form
showing identifying data
relative to such employee*
At least once a year,
or at the termination of
employment, the employer
must furnish each of his
employees with a state­
ment showing the total
amount of his wages and
employee’s tax for the
period covered b y such
statement*

paying a similar tax him­
self, the employer must
(1) apply for an identif­
ication number, (2) enter
®n each pay day in every
employee’s wage book,
the amount of wages paid
and his initials, (3)
enter the amount of
wages on a companion
slip, removed from the
book and retained until
the end of the quarter
(see p* 35 for specimen
page in wage book), (4)
fill out a quarterly tax
return showing total
wages paid during the
quarter and taxes due,
and (5) forward the re­
turn, the wage slips in
his possession, and the
tax remittance to the
collector within the
month following the end
of the quarter*
Same as Plan I,
except that form ’would
also be used if employee
failed to present his book
to the employer for wage
entries*

a similar tax himself, the
employer must (1) requi­
sition and purchase stamps
in advance of paying wages,
(2) affix the proper number
of stamps on the appropri­
ate page of each employee's
stamp book every pay day,
and (3) cancel each stamp
by initialling*

No provision for
receipts other than that
represented by employers
entry in wage book.

No provision for
receipt other than that
represented by stamps in
the employees * book#

Same as Plan II

82
-

1947. -

..(This stub to be removed by employer — See other side)

social security record

- EMPLOYER REPORT OF WAGES PAID UNDER
FEDERAL'INSURANCE CONTRIBUTIONS ACT

1947

OF WAGES RECEIVED BY

JOHN DOEREME

for
Mar« 31.
-i quarter June 30.
| ended: Sept•3 0 _
;
Dec* 3 1 __ {
; ______
_
i

123 45 6789

Date of j1 Amount of j Employer's
Payment i! Wages
i Initials
1$
:
i
.
!
j—
__• .. -j ,
„
1j

[
...
“”l
|—.

:
•. :

j
.

31

! JOHN DOEREME

)
for Mar.
—
| quarter
June30_
ended: Sept*30

123,45.6789

_

(Do not remove this stub)

35 -

Dec.

;
.
*
i
" :
j
.
-____

>

I

:

!
i
j
i

j

j

__ ___•

.

:

jT O TAL____ ¿J

^

I
j
iFor official use ojxly:

I ’
(identification Number)

)

I

(Employer’s Name)

:

employer

|

r——1 ---- — ■j
Date of
Amount of \
i
‘.
Payment
>
.
Wages
!
j
r~*~
I certify that I have paid to
A
:
.___
____ the above-named employee the
.
. . = n wages shown on this page.
•
i

,

total

31 — ■

i

Sfii

(Employer’s Identification No.)

(Address)

B.

Special cases

No need for special
treatment of any groups»

)

Employers may, with
the consent of the Com­
missioner, elect to dis- ,
pense with the use of
employee books and to
follow the same proced­
ures as under Plan J*
Such employers who have
commercial and agricul­
tural or domestic employ­
ees would include the
total wages of both
groups in the tax return
now required on account
of their commercial *
employees. Attached to.
the return would be tho
wage schedule for his
commercial employees and
tho wage slips for agri­
cultural or domestic
employees,

Large employers •and
others, upon application
to the Commissioner, would
be permitted to include all
of their employees in their
quarterly returns on
Form SS-la* Such employers ,
will not have to affix any
stamps in the books of
their agricultural workers
but must enter therein at
least every six months the
total,wages paid to such
employees during the inter­
vening period.

3 . - EKPLOYBES’ BURDEN
Plan I
Present System'
Employees’ only
duties will consist of
■filling out and filing
their applications
(Form SS-5) for social
security account numbers,
and of informing employ­
ers with respect to such
numbers c

Plan II
Book-Return System
In addition to fill­
ing out and filing their
applications for a wage
book and social security
account number, employees
must remember (1 ) to carry
their wage books with them
every pay day, and (2 ) to
present them to their
employers for appropriate
entries (unless the books
are loft with the employ­
er), (3 ) apply for a new .
book near tho end of tho
year, giving any change of
address, (4 ) sign their
old wage books and send
them to the Social Secu­
rity Administration after
the close of tho year.

Plan III
Stamp System
Same as plan II,
except that new books
would be applied for every
six months instead of
annually.

83

T 37

In case an employee
loses or destroys his
v/age book or fails to
receive a book from the
Social Security Admin­
istration, he must
promptly notify the
Social Security Admin­
istration thereof«,
Uhenevc r an employ­
er fails to make entries
in his wage book, the
employee must write in
the amount of wages, the
date of payment, and name
of employer, on a page
designed for the listing
of delinquent employers*
4.
Plan I
Present System
Enforcement of the
employees’ arid employers’
taxes imposed by the
Federal Insurance Contri-.
butions Act will be un­
dertaken by the Internal
Revenue Service and will
be primarily dependent
upon employer willingness
to comply«

A.

Samo as Plan II

Same as Plan II

ENFORCEMENT

Plan II
Book-Return System
Same as Plan I, but
in addition, the employee
and the Social Security
Administration will be in
a position to assist in
assuring compliance by
employers.

Plan III
Stamp System
Enforcement under this
system will depend prim­
arily upon employers’
acceptance of the stamp
plan, employees’ efforts
to insure compliance by
their employers, and the
efficiency of the Social
Security Administration
in issuing and processing
stamp books.

Regular contact with
employer

The mailing of Form
SS-la shortly prior to
the end of each calendar
quarter, will be a re­
minder to each employer
his recurrent lia­
bility.

Same as Plan I

No provision for
regular contact with
employer.

- 38 -

B.

Spot chocks and audits

Agricultural employ­
ers who take a deduction
for wages in their income
tax returns should not
present any substantial
enforcement problem in
view of the disclosures
which such employers are
required to make in their
income tax returns.
In the case of do­
mestic- employers, and of
farmers who do not file
income tax returns,
efforts will be made by
way of periodic radio
broadcasts, spot checks
and audits by deputy
collectors, and by action
on complaints (when
practicable) to insure
adequate compliance.
Assessment lists covering
prior periods will be
available for such spot
checks as may be deemed
advisable. The require­
ment that the employers
maintain a record of
their pay rolls should
assist in the completion
of whatever audits are
deemed necessary*
C,

Same as Plan I

This system docs
not lend itself to
effective spot checks
or, audits by the Internal
Revenue Service or the
Social Security Admlnistration.

Same as Plan I,
except that since employ­
ers Will not be required
to keep vrage records
(other than a copy of
the tax return showing
total wages), completion
of an audit may require
securing copies of wage
reports from the Social
Security Administration,
involving delay.

Employee participation

Employees would be
free to remind their
employers to withhold the
social security tax, to
file quarterly tax returns
and furnish annual or
termination wage state­
ments,
In addition they
would"be free to check on
employer compliance by
ascertaining from the
Social Security Adminis­
tration the wages credited
to their accounts.

Employer entries in
Virago books each pay day
would be a reminder to
employers to file quart­
erly returns, and that
such v/age books when
filed with the Govern­
ment UIQ.y disclose noncompliance e

The books presented
by employees vrould be a
reminder to employers to
obtain the necessary
stamps.

84
-39 Employees* wage
books will be examined
by the Social Security
Administration to
ascertain cases of noncompliance . Delinquen­
cies will be checked by
the Social Security Ad­
ministration and, if
substantiated, will bo
referred.to the internal
Revenue Service for such
action as is deemed
practicable (unless, in
pursuance of existing
policy, enforcement
action must be under­
taken in each such case)*
Employees 1 failure
to return their wage
books to the Social Se­
curity Administration,
and present their books
te employers will require
some action by the Social
Security Administration*

On receipt of com­
plaints regarding em­
ployers * noncompliance,
the Social Security Ad­
ministration will conduct
preliminary invo stigati ons
and, in the event of de­
linquency, will report
its findings to the
Internal Revenue Service
for action. Action by
the Internal Revenue
Service will depend upon
the amount of the defi­
ciency involved, the.de­
gree o f .yjn.11 fulness, or
the likelihood of recur­
rence .
Same as Plan 11$
investigations by the
Social Security Adminis­
tration will be particu­
larly necessary in the
case of an -annuitant.

TAXPAYER RESISTANCE AMD INERTIA
Plan I
Present System
A*

Plan II
Book-Return System

v

;

Plan III ..
Stamp- System

Employers

The failure of. house­
wives and farmers to keep
records, the burden of
filling in and filing
quarterly returns on
Form SS—la, and the aver­
age housewife’s complete
lack of tax experience and
tax responsibility, will
present difficulties in
the enforcement of this
system, However, employ­
ers who have regular full
time employees will have

The remarks about
Plan I are fully applic­
able to Plan II, since
Plan II would include
the same taxpayers.
How­
ever, to the extent that
Plan II operates to
reduce the record keeping
requirements of housewives
and small farmers, en­
forcement may be improved*
In addition, employees may
be expected to assist in
enforcement.

The remarks about
Plans I and. II ‘are applic­
able to Plan III* ; How­
ever, there would be less
enforcement pressure from
the income tax, because
there would be no social
security tax return to
check against income tax
deductions, • To the ex­
tent that the mechanics
of acquiring and affixing
stamps is more distaste­
ful than filing returns

- 40 -

developed a close rela­
tionship with then, and
it is unlikely that such
employers will resist a
system, designed to pro­
vide OASI to their
employees•
Some housewives may
Resistance or
r sent hawing to handle
inertia can be expected
soiled wage books, and
from occasional employers.
farmers may resent making
Unlike agricultural em­
entries in. their employ­
ployment , the wages paid
ees’ books under field
for domestic service arc
conditions.
not deductible for income
tax. purposes«, Hence,,
domestic employers may
feel more free to con­
ceal such wages* The
same considerations
will also be applic­
able in the case of the
small farmer who does not
file income tax returns,
and who hires occasional
help.
Employers in agriculture include hundrods
of large organizations,
some already subject to
the present reporting .
system, which keep some
record of the wages paid,
to their workers for
purposes of the'income
tax deduction, Approx­
imately &0% of agri­
cultural workers arc
employed on only 6 0 0 ,0 0 0
farms 0 bhile the majority
of such workers may be
casual or part time employ­
ees, the employers occupy
a fairly substantial
economic status and are
unlikely to jeopardizetheir income1 tax deduc­
tions b y failing to com­
ply with the social
security tax.

and keeping records, it
may engender some re­
sistance not provoked by
the other two plans. To
the extent that employees
fail to present their
books, employers will find
it difficult to comply*
The sijail and occa­
sional employer in the
agricultural as well as
the domestic area may
frequently neglect to
purchase stamps for his
employees’ books, and he
may never see the employ­
ee again# It is doubt­
ful that the employer
in such cases will send
the stamps in directly
to the Social Security
Admini strati on.

-

41 ~

85

Employees

rd'fiopi

Many employees nay
All of the consider­
fail to present their
ations discussed under
wage books to their em­
Plan II with respect to
ployers on pay day, or
the attitude of employees
to return then to the
are equally applicable
Social Security Admin­
under this system.
istration* Such nonMoreover, the poss­
conpliance will result
ibility of counterfeiting,
from (1 ) he gli gence,
and the possibility of in­
(2 ) a desire to avoid
flating wage credits by
the withholding of
purchasing and cancelling
onployeos 1 tax and
stamps themselves, night
disclosure of income tax
give rise to disrespect
liability, and (3 ) fear
for revenuo laws generally
that reporting their
among such employees.
enplo y er1s delinquency
night affect their jobs.
It does not appear
practicable to penalize
employees for failure to
use their wage books.
- „ The likelihood of
employee compliance is
extremely difficult to
determine* Most of the
employees are part time
or seasonal viorkers, and
not being required to
use their-wage books
steadily may either
lose them or lose sight'
of their importance* A
large number of workers
will shift back and
forth between employers
who are required to make
entries in their books
and those v/ho are not re­
quired to do so, giving
rise to loss or disrespect
for the books. Failure of
an employee to present his
wage book for proper entries
/
might encourage some employers
to omit such wages from their
quarterly returns, a similar
result may occur if the em­
ployer loses the wage-slips
detached during the quarter.

- 42 -

CORRECTIONS OF U N D E R P A Y S IS
Plan I
Present System •
.

Plan II
Book-Return System

Under p a r e n t s could be
determined with a fair de­
gree of certainty because
the employer would keep
records of each employee’s
wages« The employer may
voluntarily correct an
underpayment by reporting
the additional tax, Yrithout interest, as an ad­
justment on a return
filed after the error is
ascertained* If not
voluntarily reported the
additional tax may be
assessed and collected
under established routines#
In either event the collector notifies the Social
Security Administration
of the exact corrections
to be made in the em­
ployee’s accounts*
7»
' Plan I
Present System
The maintenance of
records enables the em­
ployer to determine over­
payments with a fair de­
gree of certainty'» The
employer may correct an
overpayment b y deducting
the amount thereof from
tax due on a subsequent
return« Before making
such a deduction of em­
ployees* tax the employ­
er must reimburse the

Plan III
Stamp System

Because of the lack
of employers’ records,
underpayments may not
easily be determined.
If the amount of the
error is ascertained,
however, ‘an adjustment
may be made in the Same
manner as under Plan I.
Form SS-lc also bay be
used. Employees’ books
may not be available to
employers to an extent
sufficient to make them
useful for voluntary
corrections. 'Employees’
reports of employer noncompliance v/ould have to
be screened against post­
ed wage records before
action could be taken.

Because of the lack
of employers’ records,
and v/ith no routine con^
tact between the employer
and the collector, the
correction of underpay­
ments will not be convenient • Emplo ye rs mayreport additional taxes
by' obtaining a special
form, but there will be
no record kept to enable
tho employer to identify
the employee or to re­
port exact amounts of
wages and taxese Employ­
ees ’ reports of noncompliance should be
screened against employ­
ers ’ voluntary reports
before action is taken*

CORRECTIONS OF OVERPAYMENTS
Plan II
Book-Return System
Same as plan I except
that the absence of employ­
ers’ records will create
difficulties in the compu­
tation of overpayments and
the correction of errone­
ous wago redords « The’,,
Social Security Adminis­
tration will receive num­
erous requests for photo­
copies or transcripts of
employers’ returns.

Plan III
Stamp System
Because of the lack
of employers’ records,
and the fact that "the
employee’s stamp book
is the sole device for
tax payments, there is
no practicable method
for correcting over­
payments by means of
deductions« Accordingly,
overpayments can be cor­
rected only by means of
refunding procedures.

8S
r- m

employee or obtain his
written consent to allow­
ance of the deduction*
The overpayment also, may­
be corrected by means of fi
a claim for refund filed
by the employer or the
employee „ The c ollector
notifies the Social
Security Administration,
of the exact wage, record,
corrections to be made*

-

Under, this system,
the. purchaser of unused
stamps may obtain cash
by filing a claim for
redemption with the
collector»;. -If the
stamps.are lost or
destroyed, the value
of the-, stamps-, and proof
of loss must ;be estab­
lished* --

APPENDIX B

ITEMS POR COMPUTATION AND REPORTING OP SELP-EKPLOYMENT TAX

1®

2.

3.
4.

5*

6,
7.

Enter here your net profit or loss from business or
profession, including farming, but excluding rentals
from real estate*
(See paragraphs 1 and 2 of
explanation below.)............... „..... .......... ..,. $
If you are a member of a partnership, syndicate, pool
or joint venture which had net profit or loss from
a business or profession (excluding the rental of
real estate), during taxable year, enter here the
amount of such profit or loss,
(See paragraphs 1 and
3 of explanation below,)......,............ .......... $
Enter here net total of items 1 and 2.
Enter here wages received by you during the taxable
year as an employee on which your enployer or
employers were required to pay tax under the Pederal
Contributions Act, (if this amount is §3,000 or more
no self-employment tax need be reported,)............,$
Subtract amount in item b from $3»000 and enter the
difference here* (if amount in item
is zero
enter $ 3 ,0 0 0 ,)..................... .......... ........ ,$
Enter here the amount in item 3 or item 5 » which­
ever is smaller, (This is your taxable selfemployment income.
If the amount in item 6 is $1,000 or less enter here
I percent of such amount. If the amount in item 6
is in excess of $ 1 ,0 0 0 enter here $10 plus 2 percent
of the amount of such excess.
(This is your selfemployment tax.)..,,..... ....... .................. ...$

EXPLANATION OP POREGOING ITEMS
1* Husband and Wife.«— Regardless of whether husband and wife
make a joint income tax return on Porm 10^0, or reside in a state or
territory the law of which treats earnings of husband and wife as
community property, each spouse must report separately the amount
of self-employment income derived from a business or profession, other
than the rental of real estate, carried on by such spouse. If the
business or profession is under the management and control of only
one spouse, all of the net profits therefrom shall be included in
the self-employment income of that spouse. If the business or

- U5 -

87

profession is under the management and control of "both spouses,
each spouse must include in his or her self— employment income only
that portion of the net profits which is attributa.ble to the
services or property of such spouse# In case of a partnership each
partner shall report separately in accordance with paragraph 3 below#
2.
Rulgs.
H illing ift..Xt,
em l#— If you are reporting all of
your business or professional income in Schedule C of Porn 1QÎ+0 for
income tax purposes, the amount to be entered in this item should be
the same as that amount (excluding real estate rentals and net operat­
ing loss deduction) which you are required to enter in such Schedule C#
If you are reporting any business connected royalties in Schedule B
i
of Porn IOh O you must »include such royalties in the amount to be
entered in this item#
3* Bu lff.g f.
Q.g.filling i n .Item. — If you wore not a, member of a
partnership, syndicate, pool, or joint venture which realized income
from a trade or business during the taxable year, you should enter
zero in this item.
If you were a member of such an organization,
you must enter the amount (excluding real estate rentals) which you
are required to report in Schedule S of your income tax Porm lOUÒ#

*+* Rules for Filling 1rt Tten J»— Inter in this item the net
total of items 1 and 2. If amounts in both items 1 and 2 represent
profits, the sun of such amounts must be entered here# If the
amounts'in items 1 and 2 both represent losses, or if.1a loss in one
item is greater than a profit in the other of such items, then you
should enter zero in item 3#

f..9V fftiling.;.in_Xt.cn ,U, — If you received wages during
the taxable year as an employee on which your employer or employers
were required to pay social security tax under the Federal Insurance
Contributions Act (old-age and survivors insurance tax), the entire
amount of such wages should be entered in this item, UHLSSS such
wages amount to $ 3 ,0 0 0 or more, in which case you are not required
to report or pay self-employment tax.

TREASURY DEPARTMENT
Bureau of Internal Revenue
Washington 25, D* C*
FOR RELEASE MORNING NEWSPAPERS,
Thursday* November 27» 1947»

88
Press Service
No. S-542

George J. Schoeneman, Commissioner of Internal Revenue, today announced the
tentative revision, based on-recent Supreme Court decisions, of the regulations
defining who are employees and are therefore subject to Social Security taxes.
The revision deals only with the principles of employment, leaving questions of
specific application for later interpretation.
The proposed revision, to be published in the Thursday, November 27
Federal Register, will be held for 30 days to give interested persons
opportunity to submit written comments and suggestions, which should be
addressed to the Commissioner of Internal Revenue,' Washington 25, D. C.
After consideration of those suggestions and actual promulgation of the new
regulations, it is contemplated that a number of rulings in various fields of
business activity will be published illustrating the application of the principles
stated in the new regulations* Among the cases occasioning the revision were
United States versus Albert Silk and Harrison versus Greyvan Lines, Inc., holding certain owner-drivers of trucks not to be employees and persons unloading
coal from railroad cars into coalyard bins to be employees. Another case,
Bartels versus Birmingham, held the loader of a "name band" playing short term
engagements at public dance halls was the employer of his orchestra members, and
that the dance hall operator, even though the contract provided otherwise, was
not the employer. The principles set forth by these Supreme Court decisions
indicate broadened coverage among such important groups as life insurance
agents, door-to-door salesmen and home-workers.
The Supreme Court in those and related cases has made it plain that
determinations of who are employees involve a number of considerations, including:
1.

The social purposes of the law.

2.

Whether the individual, as a matter of economic reality,
is dependent on the business to which he renders service
or on his own business.

3f

The total situation in the case must be looked to, and
no one factor governs»

4*

Among factors tfhich are to be us«d in conjunction with
the foregoing principles, are: degree of control over
the individual performing services:; permanency of
relation; integration of the individual’s work in the
business to which he renders service; skill required;
investment by the worker in facilities for work; and
opportunities of the worker for profit or los>s*

The proposed regulations state the foregoing principles, and would
supersede the common law test, also known as the “control" or tort test, used
to determine whether a "master and servant" relationship exists.

89
TREASURE DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Friday, November 28, ,1947

Press Service
No. S-543

•The Secretary of the Treasury, by this public notice,
Invites tenders for $1 ,2 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 1 -day
Treasury bills, for cash and in exchange for Treasury billsmaturing December 4, 19^7.* to be issued on a discount basis
under competitive and non-competitive bidding as hereinafter
provided. The bills of this series will be dated December 4
1 9 4 7 ,;and vill mature March 4, 1 9 4 8 , vhen the face amount vill
be payable yithout interest. They vill be issued in bearer form
in denominations of $1,000, $5 .000, $10,000, $100,000
$5 0 0 ,0 0 0 , and $1 ,0 0 0 ,0 0 0 (maturity value).
Tenders vill be received at Federal Reserve Banks and
Branches up to the closing hour, tvo o'clock p.m., Eastern
Standard time, Monday, December 1 , I9I 7 , Tenders vill'not be
received -at the Treasury Department ^ Washington. Each tender
must be for an even multiple of $1 ,0 0 0 , and in the case of
competitive tenders the price offered must be expressed on the
Oasis of 1 0 0 , vith not more than three decimals, e, g , 9 9 .9 2 5
Fractions may not be used. It is urged that tenders be made
_°P.
Pfit^ed forms and forvarded in the special envelopes
vhich vill be supplied by Federal Reserve Banks or Branches on
application therefor. ■
;
v,cvl,,0 T°nr i S
be r©oeived without deposit from incorporated
Danks and trust companies and from responsible and recognized
d®al®rs in i£ve3tfflent securities. Tenders from others must he
accompanied by payment of 2 percent of the face; amount of
feills applied for, unless the tenders are accompanied
express guaranty of payment by an incorporated bank or
trust company.
at th?pialatv;7 after the oloslng hour, tenders vill be opened
sL,the Federal Reserve Banks and Branches, following which public
nnouncement will be made by the Secretary of the Treasury of
rfng® ° 1
a c c e p M4a.
TbA qc
ac^v^-sed of the acceptance or rejection thereof.
accen+0retar^ °£ the Treasury expressly reserves the right to
hii Sot'?1’ rf‘)e0t 8 X 1 7 or a 1 1 Anders, in whole or in part, and
reseuv^? in any such respect shall be final. Subject to these
J ? n o n - c o m p e t i t i v e tenders for $2 0 0 ,0 0 0 or less viththe avoT.dpri°e f??m any one bidder will be accepted in full at
bids
q S Price (in three decimals) of1 accepted competitive
bids-lm,:rileine?t for ac°ePted tenders in accordance with the
be made or completed at the Federal Reserve Bank on

Th

- 2

December 4, 1947, in 'ckshv.on other immediately available .funds
or in a like face amount of Treasury bills maturing December 4,
1947. Cash and exchange tenders.will receive equal treatment.
Cash adjustments will be made ..for differences between the par
v&uë; of maturing bills accepted in exchange and the issue price
of the hew bills .
.j. - “

A 'J . . Sí?;

The income derived from T^asury,.hiilf>'rWh^|t^r -l&të're^st
..or: gain •from- the, sale -or other dis,po.sitio¿^dr‘
"t;h^Sillai¿3Kal1
jpot have, any exemption^ as'itsuch,. and loss from the sale, or other
jlispb sition., of .Treasury hills- shall :.not have; -an^?.-special treatvliant, ‘
as such, ..under*:thé -Infernal ’Refende Code,dp laws amenda! tbrÿ or sAipplernentary -thereto .■.CThe "bills-' shall he ,.subjébt: to
¡,.estatej inheritance,.. gift :or,other excls e .taxes h-’
-whether' Federal
”or:State-^;but shall be exempt from all táxafion-.noW. óir hereafter
. Imposed:,bn. the. principal* or interest thereof by any.;State'; or
any -of the pos sessions -of; the United -States ,fpr, hyanÿ' local taxing authority.- . For purposes, of taxation; the .amount of. dis­
count at which Treasury bills are originally sold by- the,;United
r'State-s^ahall,be considered to be interest .0 Uhdet';Secti6 ns 42
7 and 1 1 7 .{ aj. (1.) of the Internal -Revenue Code, as amended by
h’Sectidn lib pt the Revenue -Act of. Í941, the.-, amountof discount
ÿ a't which bills issued hereunder are sold-"Shall not. be, considered
; to accrue until' such bills -•shall be .soldi 'redeemed .or otherwise
.disposed -of,..and,.such -bills are. ;excluded from consideration as
...capital assets.;. ''‘Accordingly, •the owner'’of. Treasury bills (other
.than' life -insurance companies). Issued hereunder-; need7include
jin his income, tax,, return only the; difference-betwebhj thè price
;’paid for ;
such bills, whether on original" is-sue ph,op; subséquent
purchase, and the a&obhfc -aatoialXy' rdcpSvaeâ.'ê^^
sale or
.^redemption at maturity during the taxable year -for,which the
return .is made, as ordinary gain or' los-s : 1 "i i,j. ,j;
":f ■” •- Trea-sury lepáftment Circular(Not -41B; as, amended, and this
"notice', pres cribé' the .terms; ;of. the Treasury .bilis" and govern
” the- conditions of-theirs-issue . 'Copies; of-ethe •circular; may be
bbtained-frqm .any -Federal,^Reserve Bank' or Branch. •
.

rr-

0O0

V

m

m

•

g||

.

I

,

■

90

TREASURY DEPARTMENT
Washington
Statement by Secretary Snyder on Inflation Control*
before the Joint Committee on the Economic Report»
November

2

8, 1947

Mr. Chairman and members of the Committee: J appreciate
your invitation to appear before this Committee to discuss
certain phases of the program for controlling inflation out­
lined in the President's Message of November 17»
As you know, I appeared before the House Banking and
Currency Committee and discussed this subject with them for
several hours on Tuesday. Only one business day has inter­
vened since my appearance before that Committee, and the
statement that I wish ,to make before you today,, therefore,
consists mainly of a restatement of the points thab I made
before the House Committee.
It is of the utmost importance that we extend early aid
to the Western European countries in order to assure that
people will not go hungry and cold this winter and to assure
their continued participation as free nations in the,world
economy. It is equally necessary that this aid be extended
without subjecting our economy to the strain of further
inflation.
Both of these things are essential if we wish to maintain
a national environment and a world environment in which peace
and freedom can continue to develop. If we fall short of our
goal in foreign aid, our own freedom could be threatened by
external forces; and, if we fall short of our goal in con­
trolling Inflation, we will be threatened by the danger of
economic collapse at home. We must avoid both dangers.
I am directing my remarks this morning to one phase of
the anti-inflation program. Testimony in support of the
emergency program for European assistance has been presented
by representatives of the Departments of State, Commerce and
Agriculture.
The President outlined three types of measures for the ,,
control of Inflation; one, measures to relieve monetary pres­
sures; two, measures to channel scarce.goods into the most
essential uses; and, three, measures to deal directly with
specific high prices.

S-544

91
2

It is to the .first of these measures that I will give
attention, as other representatives of the Administration
have been invited to discuss items two and three.
Anti-inflationary, measures which may he taken in the
monetary field are of course but a segment of the whole
program, and could not, by any means,, solve the -problem
alone. But such steps as can be taken when related to those
in other fields will of course be helpful in the overall
solution.
The President is greatly disturbed in regard to price
inflation, which threatens our whole economic structure, and
he is convinced that the Congress is equally concerned*
The President has laid special emphasis on voluntary
actions on the part of businessmen, labor leaders, farmers,
and consumers to hold prices down.
Intensified efforts will
be continued to obtain voluntary restraint. Certain powers
are necessary, however, to fortify the voluntary efforts.
The President has suggested that consideration be given
to the following monetary measures: one, that Consumer
Credit. Controls should be restored and some restraint should
be placed.on inflationary bank credit; two, Legislation
should be provided to prevent excessive speculation on the
Commodity Exchanges; three, intensified activity in the sale
of savings bonds.
The last item is the only one of those suggested which
comes completely under the jurisdiction of the Treasury
Department, and I shall devote my time principally to a
discussion of that particular item. I shall touch but briefly
upon the first two as they are primarily the concern of other
overnment departments and are being discussed by representa­
tives of those departments as they appear and testify,
As to i t e m one, Restoration of Consumer Credit Controls
and Restraint on Inflationary Bank Credit, these matters have
been discussed by Federal-Reserve officials. As to consumer
credit controls, I am in favor o.f their restoration.
tT,, ,Th® most effective types of credit control are those
which strike at the individual forms of credit extension which
contributing to inflationary pressures, The most importan
single form of such credit extension at the present time is
m consumer credit.
consumer credit outstanding at the end of September
1
aal"tlme peak of $11,^00,000,000. At the end of
latl f *.£U!10Unted t 0 on-ly $6,600,000,000, Prior to December
rlevh l ° t & i 'r°^uin?r lo£ms outstanding at any one time had
never reached the $1 0 ,0 0 0 ,0 0 0 ,0 0 0 level,

- 3 ,

QO

This increased use of consumer credit in the present ^ .
period of inflationary pressures can only add to those
pressures. As we all know, the curtailment of the production
of consumer goods during the war period gave rise to a
tremendous deferred demand for such goods. As we all know,
despite the fact that industrial production during 19^-7 has
reached the highest level ever attained during peacetime, we
have not yet been able, to produce enough goods to satisfy •
this deferred demand. There still exist many important
shortages of goods. But with production near capacity levels,
purchasing power made available by consumer loans can be used
only to bid up prices of consumers' goods, not to purchase
more goods. It is imperative, therefore, that efforts be
made to restrain the demand for scarce goods until supply
approaches demand.
Money market interest rates form a small part of the
total cost of consumer credit, and changes in such rates are
almost powerless to limit its extension. It is necessary to
cover specifically by regulation such matters as minimum
doWn payments and the maximum periods over which payments may
be spread on Installment purchases of consumers' goods in
order to restrain this type of inflationary credit.
In reference to the second pa,rt of item I f,Some restric­
tion should be placed on inflationary bank credit", this is
a matter under the jurisdiction of the Board of Governors of
the Federal Reserve System which has the responsibility for
overall bank credit control. Mr, Eccles has discussed this
matter with you in considerable detail* He and I have dis­
cussed it together on a number of occasions and We are
entirely in agreement that the objective is fundamental to
the inflation Control program. I do not believe, however,
that the specific proposal that he has made will accomplish
the objective in question.
I would, like to point out that I'have a positive feeling
that the major objective at this time is- to maintain the
fiscal soundness of the Government and the continued confidence
of the public in Government obligations. I feel that the
attack on the -problem can best be handled by the application
of a substantial budget surplus to the reduction of the public
debt in the manner which will extinguish an equivalent amount
of bank-held government securities. Since the end of the
yar, the Treasury has conducted its program of debt management
in such a way as to reduce inflationary pressures whenever
possible by paying off bank-held securities.
The public debt reached its peak of $280 billion on
February 2 8 , 1946. During the following ten months, it was
reduced over $ 2 0 billion, reflecting the reduction in the
cash balance in the Treasury from a wartime to a peacetime
level
Almost all of the reduction in the debt during this

4
period took place in the holdings of Government securities by
commercial and Federal Reserve Banks. Since the end of 1946,
the debt has remained substantially, constant, reflecting the
approximate balance of the budget during this period. Hold­
ings of Federal debt by commercial and Federal Reserve Banks
have nevertheless continued to be reduced and fell by over
$6 billion in the first ten months of the year, with holdings
by nonbank investors increasing correspondingly.
The concentration of debt reduction during 1946 on
securities held by banks and the transfer of over $6 billion
of debt thus far in 1947 from bank to nonbank hands have
been, in large part, the consequence of the public debt
policies of the Treasury and of the restrictive credit policies
of the Federal Reserve System. These policies have contributed
substantially to the fight against inflation, and will be
continued as long as they are appropriate. I should like to
note in this connection that a sizable reduction in the public
debt; will be possible during the early months of 1948 -- during
which months will occur most of the excess of Government
receipts over Government expenditures predicted for the entire
fiscal year.
To minimize bank credit expansion, restrictive measures
have been applied to the money market by the Federal Reserve
System and the Treasury. This has been reflected by a rise
in interest rates and a better balance between short and long
term rates.
The average rate on 90 day Treasury bills has increased
from 3/8 of 1 percent in early July to nearly 1 percent at
the present time; while the rate on 1-year Treasury certificates
of indebtedness has risen from 7 / 8 of 1 percent to 1 -1 / 8 per­
cent in the same period. During this time the yield on the
longest-term Treasury bonds — those issued in the Victory
Loan -- has risen from a little over 2.30 percent to about
2.43 percent.
The entire debt management policies of the Treasury since
February, 1946 have been.of an anti-inflationary character.
First, there was the paying off of bank-held Government debt
out of excess cash balances; second, there has been a payment
on bank-held debt out of funds derived from (a) budget surplus,
(b) trust funds, and (c) the sale of savings and investment
bonds to the. public;«third, pressure on the money market with
slightly higher interest rates. Through the payment and
calling of maturing bonds and refunding them into short term
issues, it has been possible to create an interest pressure
on the money market without an increase in the net cost of
the market debt to the Government.

W

- 5 -

:

,94

In making our decisions with respect to public debt
management, we must constantly weigh the restrictive effect
of any^proposed debt management action against its cost in
added interest burden on the taxpayer. An increase of 1/2
of 1 percent in the average cost of carrying the public debt
for example, would mean an added burden of '.$1 -1 / 4 billion a *
year on the taxpayer.
At the present time, as.you know, the interest cost on
our public debt amounts to more than $5 billion per annum.
This is a large figure and may increase in the future if a
.Larger proportion of our debt is carried in longer-term
securities requiring higher coupon rates of interest. It is
therefore, imperative that during these times of great
prosperity we should continue to collect adequate revenues
over and above a balanced budget to provide for a systematic
reduction of the debt total*. A reduction in the debt through
a substantial budget surplus is the most anti-inflationary
measure that can be taken in the fiscal field.
In the field of commercial bank loan credits, the Treasury
Department, through the Comptroller of the Currency, has been
very active in studying trends and taking steps to induce a
restraint in inflationary bank loans.
^A few weeks ago, we had the District Chief National Bank
Examiners in for a conference, at which time the credit
situation was discussed at some length. The Chief Examiners
were instructed to have their examiners, during the course
of examination of banks, counsel with and caution bankers
against speculative lending policies .
More recently, the Board of Governors of the Federal
Keserve System, the Comptroller of the Currency, the Federal
Deposit Insurance Corporation and the Executive Committee
oi the National Association of Supervisors of State Banks
ave collectively taken steps to urge the curtailment of all
loans either to individuals or businesses for speculation
in real estate, commodities, or securities. In a joint
statement issued last Tuesday by these agencies all bankers
are urged to confine the current extension of bank credit
to the greatest extent possible under existing conditions
consumer°demand^
helP production rather tha« increasing
Item
presented
should be
commodity

two: Secretary of Agriculture Anderson has
testimony to this Committee on legislation that
provided to prevent excessive speculation on the
exchanges f

Item three makes recommendations for the intensification
of activity of savings bond sales as an anti- inflationary
action.

-

6

95

-

As the President said in his message of November 17:
"Another effective weapon against inflation is increased
savings by the public. .Every dollar that is saved instead
of spent is a dollar fighting against inflation. In order
to encourage additional savings, the Government should
intensify its vigorous efforts to sell savings bonds.’”
Since the war, as an economy measure, the Treasury
Department has curtailed enormously the organization of the
savings bonds division, and has resorted primarily to those
programs for which the voluntary cooperation of individuals
and businesses could be recruited. While this procedure has
been eminently successful and has produced most satisfactory
results in maintaining bond sales in excess of bond redemp­
tions, it still has its limitations.
Up to now the day-to-day efforts of the Treasury savings
bond sales organization has been to maintain the popularity
of the payroll savings plan among American workers and to
sell to the American people the idea of investing regularly
for their own good. This program has formed an Important
part in the Treasury's fiscal policy.
During the war, it was obvious to people why we needed
the savings bond program. -Everyone could see that-the
Government needed dollars, -- over and above taxes -- to buy
munitions and pay wages -and subsistence for our armed forces.
Each of us-had someone -- son, daughter, brother, sister,
loved one -- in service and therefore had a direct Interest.
And, in addition, everyone could understand that savings
bonds helped to absorb inflationary dollars which were ac­
cumulating at a rapid rate because incomes were growing while
goods and services available for purchase were not.increasing
accordingly due to the fact that war goods were using up
materials and labor.
But now that the war is over many people do not under­
stand the importance of the savings bond program today.
The savings bond program absorbs excessive purchasing
power in the hands of individuals. This cuts down spending
pressures. For this reason;-emphasis is being placed -- and
^^•dl continue to be placed —- on the payroll savings plan
for workers and on bond programs for Individuals, and
especially farmers, The important funds to obtain are the
small amounts Invested regularly by millions and millions
oi people, it is the money which is more likely to go on a
spending spree that is the most important to get invested in
savings. The investor we want-most Is the individual — the
worker with good income and the farmer whose Income is at
a high level.

_ 7 -

Bond sales of this character are important from a
fiscal point of view even if we have a balanced budget, for
they widen the ownership of the debt and provide a sounder
debt structure. At the same time the sale of these savings
bonds makes an important contribution to the control of
inflationary pressures*
It withdraws funds in the hands of the individual from
the spending stream thus providing funds which enables the
Treasury to retire bank held debt.' This in turn results in
a reduction of the money supply in the economy.
In order to increase* the sale of United States Savings
Bonds, however, we have an intensive selling job to do.
The.Treasury Department is ready to move right away on
an enlarged savings bond sales activity. But this increased
sales activity will require additional funds over those
earmarked for this purpose in the budget for fiscal 1948.
We are therefore asking the.Congress to give approval to the
use of additional funds for the savings bond program over
and above those approved in the budget.
The present greatly reduced staff in Washington and in
the field can be expanded immediately. With additional
personnel and funds for promotion, the number of purchasers
on payroll savings plans can be greatly increased and the
sales of savings bonds materially multiplied.
Incidentally, I think that you would be interested to
know that total sales of savings bonds are continuing to
exceed redemptions and the.volume* outstanding has reached
a new high — nearly $52 billion. In E bonds alone there
are-$3 0 ,8 9 4 ,0 0 0 ,0 0 0 outstanding; this volume is today within
one-quarter of 1 percent of the peak volume of E bonds out­
standing at the close of the Victory Loan nearly two years
ago. We have been able, in other words, to increase the
savings bond total and to sustain the volume of E bonds out­
standing throughout this period of postwar readjustment.
This has been a tremendous accomplishment. There were
those, you remember, who predicted that the termination of
the war would be followed by wholesale cashing of savings
bonds and the liquidation of much of the effect of the
Wartime savings bond sales effort. The truth is that this
just didn't happen* The redemption record of United States
Savings Bonds is a cause for considerable gratification for
all of us. It is a tribute to the people who sold the bonds
during the war and to the people who purchased them,- I am
confident that with the additional effort that will be
provided by additional funds, good results can be obtained.
I have with me today representatives of the Treasury
savings Bonds Division who are prepared to present, with your
approval, some interesting statistics in this field.
■0O0

. 97
T ï i A S Ü K ÇEPAETMEKT
Washington

FOR RELEASE- ATTSJÉ&îf PAPERS
Wednesday, December 3. 19A7

Press Service

wmt Sn5A5

A; staff *studÿ entitled "The Income Tax ¡Treatment of Pensions \
ahd Annuities” was-made public by the Treasury Department today*
The study' is; one- of the series dealing.' with various aspects of -past-'"‘
war tax revision* I't is factual ^and. analytical in: content/'and;
makes no policy recommendations.
:,
d ' u «’i S
K
Problems of -the taxation o f .pensions and..annuities have become
increasingly--important as the result of,lowered personal exemptions
and increased >tax1 rates* 'because pension and annuity recipients as
a group are elderly and retired people whose incomes -are for the most
part fixed, they have felt keenly t h e ,double-;pressuré -of higher 1 ;
living costs, and wartime tax inc reas es.«i The, study notes that; the
problems connected-with the taxation of pensions and ;annuities will
become ¡more pressing :as the proportion of ;ch.© population 1receiving
pension c$nd.- annuity benefits increases* •
1
"k%
i
;-y‘-: y '
There are nbw about 2,500, 0 0 0 .ryaericans ^receiving amiuities,
pensions or retif emeriti benefits, not counting veterans* pensions*
The number is growing, ahd will 'continue .to .d o .s,o -.as existing 3
retirement programs- attain maturity and, :peQc#e fully oper-atiye,
and as the relative importance of older people in the population
rises* The study notes that persons over .65; years: of age will
increase from the present 7 percent of the population to about '
Ilf percent •by 1980 *
'' y /..
v ,;.'
..■ ; •% y'
A basic strip'in taxing 'annuities und.e.rrthe- incbme tax is t o :
segregate that part of the annuity receipt which :Consists of the*
repayment of capital or return of the ;recipient* S investment in
the annuity, and to apply thé tax'only to the balance, or to the
portion which is income* This income consists of interest-’earned
on the ¡investment> and in the case of employee retirement annuities
also includes an element of deferred wages which represents the ' :
employer Vs-.coritributibn* '
.
..
•' ¡V ' \'1 -*
Present law segregates"the income portion of an annuity by the
use of ”3 -percent rule” adopted in 193 A* .Under this ¡rule, the
recipients of an annuity payment reports as income: for :tax purposes
a portion .of the payaient equal to \ percent of the .cost: of the
annuity* The balance of each annual ’
payment ^is excluded as repay-;
ment of, the ¡amount invested in the annuity, until th&. cumulative
amount excluded'equals t he‘consideration, |Pvid f.qr:the annuity*
Thereafter^ the :entir e smou.- t of'.each annuity payment --is.' included'
in taxable income«'
'■
,_,<v

- 2 -

The study points out that the present method for determining the
taxable portion of pensions and annuities is unsatisfactory in a
number of respects.
The allowance for return of principal, or amount invested in the
annuity, may prove inadequate in many cases, notably those of
purchasers of annuity contracts under which payments begin immediately.
Under such contracts the "3—percent rule 11 generally overstates the
income portion of the annuity# Annuities are written on a yield
basis which reflects the trend of investment yields and m a y in some
instances actually result in a yield of less than 3 percent to the
annuitant, but more important is the consideration that the 3 perdent
is based on the original cost of. the annuity.and so makes no
allowance for the declining capital investment resulting from the
annuity payments# Thus the annuitant is prevented from recovering
his investment tax— free within his normal life expectancy#
À further criticism of the 3 -porcent rule is. that in the case
of deferred and employee annuities the exclusions are lumped into
the: early'ye at*s: aid hence may deprive low-income annuitants of
tax benefits,' dde to overlapping of annuity payment exclusions with
personal exemptions and deductions# The present method is also
criticized because particularly in the case of deferred and employee
annuities the present treatment tends to distort the me a sur orient of
a taxpayer’s ability to pay, because after an annuitant has recovered
his principal through yearly exclusions he may. be confronted with an
abrupt -increase in taxable income and tax liability although his
annuity payments remain unchanged#
1 ' '. , . .
The 6 tudy examines several alternative methods for correcting
the inadequacies of the ’'3 -perc.ent rule" provided under present law#
One such alternative is to divide the.payments received by annuitants
into two parts, principal and income, spreading the exclusion for
capital recovery evenly over the period during which payments are
received# Another possibility is to modify the present rule by
reducing the amount required to be,included in taxable income from
3 percent to some lower percentage, say 1 or Ig percent of the
investment« This might be coupled with provision to include -a larger
portion of the annuity in taxable income, at the .option Of the
annuitant* The third alternative considered would include in the
annuitant’s taxable income the amount of interest deemed to have
been earned on the declining reserve behind his annuity©
The study points out that under present law exemption from income
taxes is authorized for certain categories cf retirement benefits,
such as those provided Under the.railroad retirement and social
security systems, and that this has encouraged proposals for similar
treatment of other pension and annuity payments* It.observes^that
inequalities could be eliminated, by including social security old—age
and survivors’ insurance and railroad retiremoit benefits in taxable
income subject to the generally applicable revenue' laws# In that

98
-

3 -

event, it might be desirable to prescribe a method for distributing
these benefits between income and return of principal, since they
consist partly of the return of payroll contributions made by the
employees *.
The present tax treatment of pensions and annuities involves a
These include the treatment
of lump-sum distributions under retirement plans, single-premium
annuities purchased by employers for employees outside qualified
employee benefit plans, and interest accruals under deferred annuity
contracts•

number of equity and loophole problems*

The comparative treatment of contributory end none ont r lb uto ry
pension arrangements raises broad questions of equity and tax policy
which the study discusses.
The present exemption of disability retirement pay of regular
Army and Navy personnel favors the recipient of disability pay as
against ordinary retirement pay. The study notes that a possible
method of obtaining more comparable treatment would be to restrict
the exemption accorded such disability retirement pay to the
oroportion which corresponds to the degree of disability for purposes
of civilian employment.
In summary, the study makes clear that opportunities exist for
the structural revision of the pension and annuity provisions of the
income tax which would make & significant contribution to the develop­
ment of a. sound postwar tax system, and that greater equity could be
achieved for the benefit of elderly and retired persons without
serious loss of revenue*
Statistical tables accompanying the study present data on
pensions and annuities from 1911 —A4- income tax returns arid a variety
of other pertinent information. The tax treatment of pensions and
annuities under Canadian law is described.

THS IFOC?*13 TAX TPFATMFFT OF PFFSTOFS AFD ADIRTI TIFS

Pivi sien of Taje Pe search, Treasury Department
December 19^7

The Income Tax Treatment of Pensions and Annuities

One of the areas in the Federal individual■income tax which
calls for reexamination in connection with general tax revision is
the treatment of pensions and annuities. The problems in this areahave become increasingly important as a result of wartime reductions
in the personal* exemptions -and- increases, in- tax- rates*, and the
increases in the cost of living. They will continue to grow in
importance•as the *proportion-of the population parti cipating in •;
pension andt annuity, plans- increases.. — , „
'
| | Egp •;
This- study- examines* those- phases- of -the- pension and annuity
provisions ofttne- revenue- laws- which- have-been criticized* and.
considers, alternative methods of revision... It:contains n o .policy
recommendations, and- is. confined, to. providing- factual, and analytic .
background material to assist in the formulation of such recom­
mendations.- ........ .
.....
,;h
-•(
vaiixdr g ' -*
v ,
This, study, w a s vprepared, in. the. Individual Income Tax Section
of the Division, of Tax Research.. , The., reyenue. estimates 'were supplied
by the' Oflice òf the Technical Staff:* Valuable- assistance and
suggestions, were •received- f r o m .other members' of :the-Treasury staff*
including- the Government. Actuary, on. actuarial matters* "the Office
of Tax Legislative Counsel on legal, matters* and; the'.Bureau of

Internal. Revenue, on. administrative, matters.

■Division cf. Tax Research.
U.S . Treesury Department

The Income Tax Treatment of Pensions and Annuities
•'Table of Contents .
4
'’ .
Summary
I.

-•

>.f i

.If

h

v

y

I n t r o d u c t i o n / . * > v ; .................... yl

.■« ;•
?*•*

;
n

..,«:•*; •*

||| ’•/
• .
vPage:Eo
'
•* ■'1

II # Amounts and. numbers ;of taxpayers 'involved.............. * •..... *"
A* Statistics of Income data...... ......... ......... *......
B. Other data on pension and annuity income and-recipients..
1 , - Exempt groups... ,..... .> .......... ........» ***.»»♦..*.• •
2, -Taxable, groups.'............. ,
♦
.
*........
C.
III.

*■
^
p
5
7

3 ,•■Eetir'ed inactive Army' and. Havy personnel.:.......y*: 7
•.. . • *> ** * *•• *♦ •• •**• * 9 .

Future .magnitudes....,....

Problems and issues under present lav/..............
11 .
A. The 3-percent annuity rule..... .. .. . . ..... <.’.yvy..... .> *y 11;;
1 , :^ m m a r y of provisions....> .y* ••
• •• * ••••*■'** *'•>' l l ;
2. Problems...... ....... . .. .
.•.»v.;* »• ♦ • •
*2'".
a. Inadequate allowance for return: of principal. . 12 '
Income distortion under tiie- 3-pereeiat.rule.';, .’y i h y
n:p.#.. Other problems. . . . . . . . . . ; .y> .i..> v.;.••. ••«• * 15 ;
' (1 ) Lo sses of’short-lived:annuitants:,..,. *-.1 .•
’15 "
(2 ) Complexities,....... .................. . 15
B. Special exemptions........ ...... ......... ................ lo
1* Exempt classes.............. ......... .
16
a. Social security and railroad retirement
pensions............... ,........... ..... .
16
b. Compensation for injuries or sickness, and
disability retirement p
a
y
.
l
6
c. Pensions which -are gratuities,,,............... 17
2 , Equity and revenue considerations.,....... ......... 17
3 . Proposals to.create additional exempt classes...... 20
a . ■ Pension and annuity exemptions................. 20
b. Special ago exemption in lieu of retirement
income exemption.
.... .............. .
-21
C. * Lump-sum payments................ ....................
23
1 . Distributions under retirement plans............ .
23
2# Purchase of annuity contract outside qualified plan. 23
3* Exemption of survivor benefits qualifying as life
insurance proceeds
..... ............ ............ 24
D. Comparative treatment of employer and employee
contributions under retirement plans.............f.f... * 2 ^+
E. Exemption of installment payment of life insurance
proceeds by reason of death of the insured,...........%, 25
F. Tax avoidance under deferred annuity contracts........... 2 o

101
Table of Contents
- 2 -

Pago Ho,
Or*. Areas of uncertainty in the treatment of annuities ,f
1» Definition of annuities and treatment of refund
annuities.,.,..... .v
*
• 27
'2 , Annuities arising out of property transactions,,,,

27

¿•j

IV *

28

Alt ornative solutions,.......... 28
A,
Change in the 3 ^P®rceat annuity rule .. . . . . . . . . . . 2 8
1 . Inclusion of the average income portion of each
annuity payment ............... ,.M *.*.*■» 29
.a, joint and'-survivor a n n u i t i e s , ^ ,.-*»>,, 31
(l)' joint-survivor life-expectancy method.., 31
(?.) vomited-value basis to the survivor,*... 32
(3) Split-cost m e t h o d . .f..,,.,#*r* 33
b. Refund annuities.,..>*..................• •«* 35
2, Modification, of the 3-psrcsnt rule...........V,,,, 37
a. More adequate-provision for capital recovery,. 37
b. Deduction for losses incurred by short-lived

annuit;mt^ ^mortality looses)
.. 39
•3 « Keserve-earnings approach.’,......... ► . , , , L .
Uo
H.

Transition problems,
.... . *,,
b-1
a. Limit the new method to annuities becoming'
effective in the .future,
,V,,. , Ul
b. Treat existing annuities as though t h e y ’had
been subject to the new method.f ror* -the''* >-.a.
beginning...................... *
c. Allow annuitants to use the'new method pro­
vided they recompute their tax. on the new
basis for previous years........
I
;
,
d. Apply the new method to existing annuities
using the amount of consideration.; not' already
excluded from gross income as the cost basis
for the future,
U2
Treatment of social security old-age and survivors
insurance and railroad retirement benef its,,,,,.....»„,
Treatment of lump-sum r
e
c
e
i
p
t
s
, U6
1 # Capital gains treatment. . . . . . . . . . . . ; « * , • •
U6
2, Treatment of purchase of single-premium Annuity
outside qualified plan.... .w .*> t
0* U6
Installment payment of life insurance proceeds paid by
reason of death of the insured,.,...,,.,..,,,,,,,,.,,.
^7
Deferred annuity contracts.
* U7
Comparative treatment of contributory and. honeontribu*
tory pensions,
---- ------------ 47
Other c o n s i d e r a t i o n s . U 8

hz
Uz

D*
C*

D,
A#

3»
0>

*

Kz

Table .of’Contents

.

- 3-

.

Appendix A •* .Tables 1 — 9 ' .
A- / «
t .Table Ho# ] ~ .Title
/ - r
'
P
Annuities reported on taxable and ncntonrable returns
"with h e t .income, 19 ^ 1 » by net income c-lasses; also
. -'aggregates for individual returns with no liet income
?
;V:-a

’
?

.... \
x

*Annuities reported on individual returns with net
income,.I9IKL, by-taxable and nontaxable returns,
and by net income classes; also aggregates for
: - taxable and-non taxable individual ..returns -with--no
net* income
• •
'

Tom

.

*'• • Annuities reported on individual' returns,
1040,
witli.net income and-with no net income, 19 ^41, by
.. .
States and Territories

•. ,k

•

Annuities reported on individual returns with net
income, 19 ^2 , by taxaole and nont&xablo returns,
and by net income classes,;- also aggregates for
individual returns with-no, net income
Annuities reported on taxable;and nontaxable
individual returns.-'with net income, 19^3» by net
income classes; also aggregates for returns with
no net income
Annuities and pensions reported on individual
returns for 19*44, by size of adjusted gross income

7,

Annuities and pensions reported on individual returns,
by size of annuity .and pension income

g
. .

9

:„

. Humber of annuitants currently being paid and amounts
of payments for important annuitant groups
..... .Civil-Service annuitants on the roll by size of
annuity (fiscal 19 ^ 5 )

Table of Contents

Appendix

'—

Report of .;.-the Canadian Royal -Cpinmission on the
Taxation of .Annuities and Family. Corporations

' (9 pages)''...
Appendix C

-

r

Formulas for Determining Benefits under Present
Social Security and Railroad Retirement Provisions
''( 5 palges)- M ;v,
t ■.. .• . A

Appendix D *~ Annuities and Pensions- (6 pages)

SUMMARY
In recent years a number of criticisms have been directed at the
provisions of the individual income tax which govern the tax treatment
of pensions and annuities« These provisions directly affect millions',
of elderly and retired people currently receiving pension and annuity
incomes and have prospective importance to all employed persons*
annuity investors* or their families* who at sore future time will
become beneficiaries ©f pension and annuity payments.
Excluding recipients ®f veterans* pensions* approximately 2*500*000
Americans are now receiving annuities* pensions, or retirement benefits»
In 1944* the last year for which final data are available* more than
250*000 persons filed Federal income tax returns reporting pension and
annuity incmes derived fr©m life insurance policies* individual purchases
@f annuity contracts* and private or public retirement benefit plans«
The relatively low level of most annuity payments and the authorized
exclusion from taxable income of certain types of retirement benefits* as
well as the reporting of some pensions and annuities as wages or salaries,
are factors which combine to reduce the number of persons reporting
annuities under the income tax« The number of pension and annuity
recipients is growing and will continue to Increase as existing retire­
ment programs attain maturity and become fully operative* and as the
relative importance ©f older people in the population rises« About 7
percent of the population is now over 65 years @f age* and*^with present
trends* this percentage is expected to increase to about II 2 percent by

1980*
A characteristic feature of pension and annuity recipients as a
group is that they are elderly and retired people whose incomes are
for the most part fixed« As a result* they have felt more keenly than
others the double pressure of higher living costs and wartime tax
increases.
Annuities received by individuals consist in part ©f the return
of principal (the amount invested in the annuity) and in part ©f income.
The problem in taxing annuities under the income tax is t@ segregate
that part ©f the annuity receipt consisting ©f the repayment ®f capital
(the return ©f principal) and to subject to taxation only the balance*
that portion which consists of income. Such income consists of interest
earned on the investment and* in the case of employee retirement annuities
also includes an element of deferred wages. Existing lav/ seeks t© provide
for the tax-free recovery ®f the annuitants capital ©r investment by the
application of the so-called 3-percent rule adopted in 1934*
This rule
prescribes the inclusion of 3 percent of the cost of the annuity in the
recipient!s taxable income each year. The balance ef each annual payment
is excluded from income f©r tax purposes until the cumulative amount

- il­
ex elude A equals the óònsideration paid for the annuity.
(Thereafter,
the entire ambuni of each annuity payment is included in taxable income.
This fownila for segregating income from capital has "been unsatisfactory
in a number of respects.
As to immediate annuities, the principal difficulty is that the

3 -percent rule applied to original cost makep no allowance for the declin­
ing capital investment resulting from annuity payments.
In the case of
contributory employee annuities and deferred annuities (which become
effective, only after some period of time, usually the premium payment period,
has elapsed following p u r c h a s e ) t h e exclusion from taxation of annuity
receipts in excess of 3 percent pf the annuitant’s cost generally provides
adequate tax-free recovery of the consideration paid for the annuity for
the person who lives out his normal life expectancy. Bvep in such cases *
however, the 3~Percent rule tends to ’’bunch” exclusions for capital recovery
in a few early years, after which the full amount of each annuity payment is
taxable as income.
In the process of this ’’bunching” of exclusions for the
recovery of capital, many low-income annuitants are deprived of tax benefits
because their allowable exclusions are wasted, due to overlapping of such
exclusions with personal exemptions and deductions.
If taxable income and
tax-free return of capital were more evenly distributed over the years,
annuitants would be able to make fuller use of their exclusions as well as
the personal exemptions and deductions allowed under the income tax*
A further criticism of'the 3~'r’ercent rule is that even where it
allows adequate tax-free recovery of capital with full tax benefit, it
results in an artificial variation in taxable income which tends to distort
ihe measuremént of the taxpayer’s ability to pay, Thus, when the elderly
annuitant has recovered his principal through yearly exclusions, he is con­
fronted with an abrupt increase in taxable income and tax liability
although his annuity receipts remain unchanged.
The 3-percent rule has been criticized also for its treatment of the
losses of short-lived annuitants (sometimes termed mortality losses under
annuity contracts). Although it requires the annuitant to report a part
of his receipts as taxable income before his capital is recovered, no
adjustment is made in case he dies prematurely, notwithstanding the fact
that part or all of the income subjected to taxation during his lifetime
turns Out to have been only return of capital.
The present study, examines several alternative methods for correcting
the inadequacies of the ^-'percent rule-. One such alternative is to divide
each annual payment into two parts, principal and income, spreading the
exclusion for capital recovery evenly over the period during which pay­
ments are received.
In general, under this method the element of principal
would be computed by dividing thè cost of the annuity by the number of
years payments were expected to continue. For example, in the case of a
single-life annuity* this period would be the annuitant’s life expectancy
a the time payments began, as determined by a mortality table. This
method would raise the question of the selection of appropriate mortalità
tables.

- iii ,

.

«*

■ $

■ -

•*

*

•' '

'

I

:

$

■ *>-• -r

.

C
lw

;

..

•

.

.

.

I

;
ts'
•• , ■ t;r. %
• ••
*•
■ •
If-this procedure ?were. followed, annuitants •■-•as a group would
include in taxable income the true income element in their annuity
receipts provided that their lives approximated the specified life
expectancies. •Allowance would not be made‘for '.individual deviations
:from .normal life expectancy* Favorable;treatment of individual
mortality 1gains realised b y those who chanced to live beyond their
normal..l i f e .expectancy would-be balanced against the -disallowance d f
mortality losses incurred by short—lived'annuitants*-The •.salient
feature of this plan.is that the.annuitant would include a constant
•portion of his receipts in his taxable income as long-as. he lived,
with the result that the wastage•of-capital recovery exclusions ■would
be avoided* More over > there would be- no- abrupt .increase i n his w
.taxable income after capital is recovered,- such sts occurs under “
present -law*
u*.f
:
§ ^ ^ ‘4 * ' *- H r » H §jT
£

* d iH

••

m

,

* :' ■

E ’■

-V.

' • gjtt. “

* ’• ‘ ■ ■4-'- * 1

J'

'' *•. *

.. An alternative method for meeting the criticism leveled'against '■
the.3-percent rule is (a) to reduce the amount required tor'bQr'included
in taxable-income: to some-lower percentage, say 1 or ly percent .
?of the
annuitant’s, cost (which v;ould correspondingly increase the amount
excluded as tax-free- return of capital),’and .((b)- to allow the annuitant
the option..of including a larger share of his receipts in taxable
income in order to avoid his wasting the exclusion for return of capital.
In order to avoid return of .capital being taxed, as income;, a;'deduction
from inc o m e m i g h t bo provided, for losses incurred*'by annuitants who die
before recovering.their cost free of tax*. *This' method*would meet some
.of the major objections to the., present, law* •.Howevery it would-not
entirely remove...the, problem of an abrupt»increase in the; taxable
portion of .th^..annuity
ihe end of the peripd;of •capital recovery, ^
Moreover, the benefits of-a., deduction for losses incurred b y short- :
lived annuitants would accrue to their estates or survivors and would
provide no relief to annuitants- during their own lifetime-.
Another alternative ..to -the 3-percent rule would.be to-.impute’to
the annuitant each year, an amount .of income »equal to the ••interest carried
;pn.the.reserve, behind his annuity.- The amount so imputed would then be
included.in the .annuitant’s taxable income. •This would'have the effect
of treating annuity payments-like withdrawals’from a bank account,
consisting partly of income in the form of interest and partly of
.principal*.-. Under this -procedure ‘t he,-taxable* portion lof .
’annuity^income
.woulq .’bo ..relatively-large ..during .the carly- yoars when -reserves Word
high, and would decrease as -the annuitant grow.-older ano the- reserve
behind, his. annuity:diminished.' ,Short—lived annuitants would pay more
.tax under rthis ^method •than under the ®ther alternatives,' while long—
lived., annuitants would be. treated .»mo-re favorably since -payments would
bo largely exempt as, the reserves behind their annuities and the income
...attributed -tq those -reserves1-dropped to -a.very •lot/ figure* This would
accentuate -the- problem of the-' treatment of losses sinxored b y short—
.lived, annuitants* 'Moreover*- the- so—called, reserve-earning's method
would involve formidable administrative tasks in making the actuarial
analysis necessary to calculate the reserve earnings of various types
of annuities*

XV

104

At present, special categories of retirement benefits, such as
those provided under the. railroad retirement and social security
systems, are. exempt from tax* This precedent has served to encourage
proposals for similar treatment of other pension and annuity payments*
The question of special exemptions for pension and annuity incomes is
related to the proposals for special treatment of elderly persons*
The inequalities.growing out of the preferential treatment accorded
special categories of pensioners could be eliminated by making social
security old-age and survivors’ insurance and railroad retirement benefits
subject to the generally applicable revenue laws*
This would, raise the
question of the proper distribution of these benefits between income and
capital, since they consist partly of the return of employee payroll
contributions* The problem could be handled in any one of several ways,
each centered on the concept that social security and railroad retirement
benefits are in effect annuities purchased in part by the employee,’s
payroll tax contributions and their beneficiaries should therefore be
accorded an opportunity to recover their payroll contributions tax-free.
Another approach would be to allow the employee to deduct or exclude
his payroll tax contributions from his current taxable income.; and to subject
all of his retirement benefits to taxation when they are received*
This
would involve not only a postponement of revenue but a net revenue loss
as well, since the revenue decrease due to the current deduction of payroll
tax contributions from employee’s earnings would normally exceed the revenue
gain which 'would result from,his ultimate inclusion of benefit payments
in taxable income. Moreover, this procedure might serve as a precedent
for similar treatment of employee contributions under private and public
retirement pension plans and of savings of self-employed persons devoted
to the purchase of endowment policies and annuities which would involve a
radical departure from existing concepts of income.and would entail serious
revenue consequences*
The present tax treatment of pensions.and annuities involves a number
of equity and loophole problems.
One of these concerns the treatment of
lump-sum distributions under retirement plans* Under certain conditions
luinp-sum distributions from trusteed plans (where the assets of the plan
are segregated and invested through a trust) arc accorded long-term
capital gains tax treatment (such gains are included in taxable income
to the extent of 50 percent and subject to a maximum effective rate of
25 percent), whatever the merit of capital gains treatment in such
circumstances, similar distributions under non-trusteed plans may'appear
to have.equal claim for favorable treatment. An alternative to capital
gains treatment 'would be the adoption of some averaging device designed
to mitigate the impact of progressive rates on relatively large lump-sum
payments.but without unduly impairing the progression of the income tax*

V

Another problem is raised in connection with the tax treatment
of a single-premium annuity purchased by an employer for an employee
outside a qualified employee benefit plan (one which meets certain
statutory standards of no'n-discrir. ination and reasonableness as a
condition for favorable tax treatment)* Under present law, the value
of such contracts is included in the employee *s income in the year of
purchase# When annuity payments are received, they are suoject to the
3 —percent annuity rule which enab3.es the employee to recover tax-free
the consideration which has already been included in his taxable income*
Proposals have been made to allow the employee to exclude from taxable
income the value of the contract when vested .and to include the full
amount of annuity payments in his taxable income when received* Such
proposals, however, wfould tend to sot aside existing sanctions against
unqualified employee benefit plans (which do not meet statutory tests
of non—discrimination and reasonableness) and seriously impair the
safeguards against tax avoidance under present retirement—plan provisions*
.Some, but by no means all, phases of tax avoidance under such proposals
.¿night be lessened through:a modification designed to spread the employer’s
deduction of the cost of such contract over the years the annuity is
paid and faxed to the employee«
Installment payments of life insurance proceeds by reason of the
.'death of the insured are now entirely exempt, including the element of
interest accruing after the death of the insured* . If it is desired to
include such interest in taxable income in order to treat it on a par
with annuities or other investments by survivors, such life; insurance,
installment payment might be taxed as an annuity, the cost of which was
the lump-sum or commuted value at the time of the death of the insured.
Deferred annuity contracts may involve opportunities for substantial
tax avoidance through postponement of realization of investment earnings*
It might be possible t o •meet avoidance problems in this field by limiting
the amount of interest accruals, under those contracts allowed to be
currently excluded from taxable income«
The-'comparative* treatment of contributory and noncontributory
pension arrangements raises broad questions of equity and tax policy#
The current exclusion from the. employee’s taxable income of the employer s
contribution under qualified plans confers .Ii poptant tax advantages on
recipients of employer—financed benefits#
This treatment, particularly
during the war period, has tended.; to -encourage.the development of plans
on a noncontributory basis* It has.been proposed to provide comparable
treatment for employer- and employee—financed benefits by allowing
.employees currently to deduct their retirement contributions from
taxable income. As already noted, this type of proposal would signifi­
cantly modify the definition of taxable income as it rebates to^the
treatment of savings. Moreover, it would raise questions pertaining to
the averaging of income for tax purposes and the special treatment of
earned income«

The present exemption of disability retirement pay -of regular
Army and Navy personnel favors the- recipient of disability pay as
against ordinary retirement pay* Mófe comparable treatment might be .
obtained by restricting the exemption of disability retirement pay to
the proportion which represents the degree of disability for purposes
of civilian employment*
While this study makes no specific policy recommendations, it
makes it clear that opportunities exist for the structural revision of :
the pension and annuity provisions of the income tax which would make
a significant contribution to the development of a sound postwar tax
system* The advantages of greater equity in the income tax structure
as it applies to elderly and retired persons might be achieved without
serious loss of revenue* The technical and actuarial problems and
issues encountered in revising the tax treatment of pensions and
annuities are formidable© This, however, need not preclude the formu­
lation of a more equitable and satisfactory tax structure as it applies
to this increasingly important group of the population*

The Income Tax Treatment of Pensions and Annuities

I.

Introduction

.

This study ..examines‘a numher; o f ;incoine,, tax probi
>o
pensions a n d ;a,nhuii.ie:s uhder present law, -1/( nndM.ahai^ies, some. ^v-;. valternative Method fof■
-their selution* Attention;'-is'‘focused -primarily
on the..treatment of pension and .annuity "benefits.from the viewpoint of
individual' recipients^:- The’problems of employers are only,: incidentally
considered*- 2j
1
' ,r;'
’Because of the close 'relationship :between life insurance and. ¡annuity
contracts,»^ particularly; in- the case .of,deferred' annuities' and .pefirnd and
survivor benefits,’3 / ;it.is difficult; to treat matters relating to pension
and annuity taxation,, separately from the tax provisions applicable to life
insurance« .-ifohethel.ess'* ..this study makes no attempt to examine, fully the
issues raised by the ...relatively favorable tax treatment-of '.life insurance«
The existing tax previsions applicable to pensions and' annuities have
been developed in piecemeal fashion.* Since the Thirties,1 under the stress
of sharply lowered individual income ..tak Exemptions and increased tax rates,
imperfections in the present treatment of pensions and annuities have become
more evident« Pensioners as n group have relatively fixed incomes, subject
to the double pressure of higher living costs and increased taxes« More­
over, retirement incomes arc typically much lower than the previous earnings
they succeed« This or&ine.rily involves careful planning and adjustment of
the annuitant’s mode of living* The difficulties of adjustment are enhanced
where unforeseen tax and living cost increases substantially upset calcula­
tions with regard to minimum retirement needs* Pensioners and annuitants
as a group are elderly and in many instances suffer various disabilities
which may necessitate higher living expenses« These disabilities make it
difficult or impossible to make personal adjustments to higher taxes and
prices by accepting employment or by retrenching»
The income tax treatment of pensions and annuities is also growing in
importance because -pensioners and annuitants constitute an increasing pro­
portion of the population* This increase is due chiefly to the development
of public and private pension programs* While there has already been an
increase in total current payments und_er these plans, there is a still
greater potential increase a,s existing -plans attain maturity* Even with­
out further extension of the coverage of those programs, a large proportion
of all income earners and their families will at some time in their lives
be pensioners or annuitants*
1J Unless otherwise indicated, all references to ^present lawn and to
specific sections pertain to the Internal Revenue Code, a„s amended
by the Revenue Act of 19^5*
2j This study does not consider various questions relating to the income
tax treatment of pension, profit-sharing, and stock-bonus plans at the
employer level under Secs* 165 and 2 3 (p)*
3/ An explanation of technical terms is contained in Appendix D*

o

-

2

-

0

Another reason accounting for the relative increa.se in pensioners
aiid annuitants as compared with other types of income, recipients is
the shift in the age structure of the population involving a higher
proportion of olde'r persons* y
Increased urbanization and industriali—
Station heave necessarily brought 'under organized retirement pension pro­
grams persons who would have relied, as independent farmers, artisans
and business people, on their per^gnal saving's-,and investments for re­
tirement needs* Annul ties,, are a form of insurance which provide a
logical tiethod of ensuring lifetime security, combining an orderly use
of principal with the safety and convenience of institutional investment*
Consequently, the decline in interest.rates probc
ably tends to increase
the purchase of annuities, since more retired persons tend to consume
their capital at a faster rate* To some extent, the income tax advan­
tages of deferred annuities, including those arising under life insur­
ance and endowment contracts, appear to be a factor encouraging the
purchase of annuities* 2j During the period of the great depression
annuities were attractive not only for reasons of investment security,
but also because of the advantages of a fixed income under declining
prices*
The problems in the field of taxation of pensions and annuities
fall into several broad categories*
a* One problem arises in connection with the segre­
gation of the income and capital elements of annuity payments* A
satisfactory determination of the portion of annuities to be included
in income for tax purposes and the portion to be excluded as tax-free
return of capital has long been a source of difficulty in this and
ot her countries,

2/

J/

,

At the present time, about 7 percent of the population is over 65 years
of agCo According to Bureau of Census estimates., assuming medium
mortality and fertility and no net immigration, this percentage will
increase to about ll-*l/2 percent by 19S0, See Forecasts of the
Population of the United States, by Age and SexS 19^5 to 2000, Popula­
tion - Special Reports, Series P-^-6 , No* 7» September 1 5 , 19^6,
Bureau of the Census, U* S. Department of Commerce*
On the other hand certain apparept tax disadvantages, particularly as
regards estate and gift taxe^, may discourage such purchase, chiefly
where survivor benefits are a.factor*
tinder British income tax life annuities are taxable in full a„s income,
with no allowance for return of capital* However, annuities certain
(payable for a fixed term of years) and some other types of annuity
contrasts are taxable only with respect to the interest element. For
a recent discussion of the problems raised by the British income tax
treatment of annuities, see RAnnuities and Taxation,” The Economist,
February S, 19^7 j PP» 250— 252, The Canadian experience with the
taxation of pension and annuity income culmina-ted in a survey in 19^5
by a Royal Commission whose reconnenda.tions were adopted under Canadian
legislation in 19^+5 and 19^-6, The Commission* s Report is summarized
in Appendix B*

-- 3 “b* There are inequalities in the treatment of different
annuitant groups due to special exemptions for certain types of^pension
payments which, in turn, have raised the issue of extending similar
.special'treatment for other groups*
;
c* A third problem concerns the tax treatment of lumpsum retirement "benefits which nay have accrued over a period of years©
Such lump suns care subject to taxation cither as ordinary income or as
long-term capital: gains©
'
dv A fourth group involves a miscellany of loophole and
equity issues* These includes
(1) the postponement of tax on interest
•accruing, under deferred annuity contracts, (2) the exemption of interest
accruing after the death of the insured on annuities payable under life
insurance contracts, (3 ) the tax treatment accorded benefits under con­
tributory as compared with noncontributory employee pension plans, and
(%) the tax treatment of deferred annuities under so—called key executive
employment, contracts©
e* Since most annuitants are elderly people, the tax
treatment of pension and annuity income is also related to proposals
for special income tax. treatment of elderly persons©
The analysis of these problems and of the alternative solutions
possible, makes it apparent that opportunities exist for structural
revision in the pension and annuity provisions which would make a
significant contribution towards the development of a sound postwar
tax'system© In general, the major criteria for satisfactory pension
and annuity provisions are the same as for other pha.ses of income
taxation, namely, correct measurement of income, uniformity^of
treatment among similarly situated persons,, and administrative
feasibility© The equity advantages which would derive from effective
adjustment in the pension and annuity field overshadow the relatively^
small amounts of revenue directly involved© The technical .and actuarial
problems and issues encountered in the' task of formulating a sounder
approach to the tax treatment of pensions and annuities arc formidable©
These account for the difficulties which have characteristically beset
taxing authorities in their attempts to deal with this type of income©
'Nevertheless, desirable changes in this increasingly important area
might go a long way in providing a more equitable and satisfactory tax
structure as it applies’" to millions of elderly and retired persons
receiving pensions and annuities*

II.

Amounts and numbers of' taxpayers involved
A*

Statistics of Income data 1/

Annuity and pension income is .a relatively snail part, about
one-fifth of one percent of'total incone reported for incone tax
purposes, There were roughly 260 ,0 0 0 recipients of taxable annuities
filing inconè tax returns in 19^4* 2/ According to the 19^4 data, the
average annuity or pension reported on incone tax returns was about
$ 700 , with almost one-fifth of the annuities, and pensions falling holow
$1 0 0 , over half under $5 0 0 ,, another- one— qua-rter between $500 and $ 1 ,0 0 0 ,
and only about 3 percent being ¡as 'much' as $ 2 ,0,00 or more, '¡J.

■The percentage of returns reporting annuity income increases with
size of income* bj However, annuity -inesne constitutes a larger per­
centage of total income at the lower, than a-t the higher income ;level s 0 5J
The average size of annuity income increases-with, the size -of income,
but not proportionately* §J
,
17

The statistics are shown in Appendix A* Prior to 19^41 annuity income
was not tabulated separately in Statistics of Income, being included
with various items in **Other i n c o m e D a t a - from 19^41 tabulations are
"adapted in Tables 1 to 3 . Statistics of Income for 19*42 shows amounts
but not frequencies of annuity income* The 19*42 data- are adapted in
Table W
Annuities data from final statistics of 19*43 individual
income and Victory tax returns are shown in Table 5® Press releases
dated June 25, and August 21, 19*47 » Press service Hcs* S—3^6 and
S-U36 provide information on the frequency and amounts of annuity and
pension income distributed by adjusted gross income elapsesw This
information is shown in Table 6 * A special tabulation, on income tax
returns for 19 *4U provides information on the frequency of annuity and
. pension income recipients distributed by the size of the annuity and
pension' income 0 -This information is shown in Table 7«
2J Press release dated August .2 1 , 19*47 (Press service No * S—I1.3 Q . for
Statistics of income for 19^^« Part 1 , Table 2*
3/ See Tables 6 and 7.
2 J See Tables 1 and 6 *
5/ Thus, in 19 U 2 , annuity income constituted *22 percent of total Income
on Form. 10*40- returns with.net income under $5,000 and only «0S percent
.iof total income on returns with-.net income of $300,000 and 1over* Sco
Table *4* For other ye ans* see Tables 1, 2, 5 nnd 6 *
6/ To illustrate, in 19*41 <th© average annuity item was $93^. Po** returns
with net income between $5 ,0 0 0 and $1 0 ,0 0 0 , nhd $9 ,S26 for returns
with net income of $300,000 and above,* For'a, more detailed break­
down of the 19 Ui annuity da-ta by size of net income, see Table 2*
In 19^4, the average pension or annuity was $3SB for taxable returns
with adjusted gross income between $500 and $750 and $ 7 >9 ^ for returns
with adjusted gross income above $300,000* See Table 6 0

- 5 -

Thé geographical distribution of pension and annuity income shows
that residents of certain States, notably California, Colorado, Florida,
and the District of Columbia, have relatively largé amounts of annuity
income a s compa re d with o the r 'type s of' income « l/ \
In addition-to its relatively heavy distribution in the lower
part of the income scale, the amount ,of pension and annuity income
reported on tax returns appears not to have changed, significantly
during the period 1941*-*1944 when other types of income have increased, 2/
Other data on pension and annuity income and recipients '...
1«

Exempt groups •

*>

-,

Important groups of pension recipients are not represented in the
income tax statistics because their pensions are excludible from gross
income«
The latest available information regarding the-number of such
pension, and annuity recipients, and average and total amounts of pension
and annuity payeents, is shown in Table 8. About 1,708,800 individuals
are currently receiving pensions under the old-age and-survivor benefit
provisions of thé Social Secruity Act*- The average annual payment is
now about *228 per individual, total annual payments being approximately
$390 million,
,
.
;
Bnder existing law, a retired worker under social security old-age
arid survivors* insurance receives a minimum annual pension of $120.
As of 1947, the maximum annual benefit for a single-person with no
dependents is $528* For a •married person, the maximum benefit is
$792* 3/
The maximum annual benefit for a widow with three or more
minor children is $1,020, representing the highest annual pension
paya.blé--under present law;«, 4 /
■
l/ California returns for 1941,' for example, had 7*6 percent of the
total income in all States but 13*8 percent of the total annuity
income.
See Table 3«
2/ The total amount of pension and annuity income was about $164- million
in 1941, not including Form 1040A returns, and about $181 million in
Ï944*
r
,
.. ' '
3/ If both husba.nd and wife are eligible .workers who retired.at the end
of 1946, their combined maximum benefits are $1,056*
4/ For later years these maximums (other than the $1020 over-all ceiling)
will increase, depending upon the number of years elapsed since 1936*
î\iiprë detailed information regarding social security old-age;-and
survivors* insurance benefit levels is shown in Appendix C* •

As social security benefits are in all cases less, and generally
substantially less, than the existing personal exemptions, a recipient
of* social security old-age and survivors 1 insurance pension would, not
be subject to Federal individual income tax even if his ^pension were
included in gross income, unless he had other income* 1 /
The other major exempt groups, outside of veterans; and their
families, are the 1 9 9 ,4 0 0 individuals now receiving pensions under
the Railroad Retirement Act, whose average annual pension is $846,
totaling about $167 million- annually* ,
A retired worker under present railroad retirement provisions.. .
receives an annual pension which may range from a maximum.of $1 ,4 4 0
down to indefinitely small amounts, depending upon length of service* 2/
The retirement allowance is not related to the number of dependents ■
supported’,by ■the beneficia ry* Survivorship benefits a re also provided, ;
varying with size of family; For a widow the annual payments range to
a maximum of $470, as of 1947* In the case of a widow with three or
more children eligible for benefits, the maximum annual benefit would
at present be $1 ,254 , representing the highest annual family benefit
payable* 3/
•* / “
A substantial percentage of retired inactive
and Wavy personnel
are retired on account of physical disability and
retired pay is
exempt (see Section 3 below).
In addition, there are comparatively minor
groups receiving pensions partially or wholly exempt as gratuities, such
as beneficiaries of the Carnegie Foundation teachers* retirement plan
and of the International Typographical Union Pension Fund* 4/
1 / A possible exception would occur in the case of a.; widow .with one or
more dependent children receiving benefits up to $ 1 ,020 , where the
children each had $500 or more gross income and v;ere consequently
disallowed as dependents for income tax purposes*
2/ If railroad retirement payments were includible, in taxable income, .
many of the retired workers would be taxable*
3 / For
years these máximums (other than the. $1440 over-all ceiling)
will increase, depending ttpori the number of years elapsed since 1936*
Fo:r more detailed information regarding railroad retirement benefit
levels ¿ see “Appendix C*
.
•- .. .. .
4/ In 1946, it was reported that the International Typographical;Union,
'
Pen cm Fund had 69648 pensioners on its rolls; indi vidual; pensions
were at the rate Of $10 a week, or $520 a yearj total pension ipay-r* .•
ments to union members in the United States and Canada amounted to
$3; 447*. 128 in 1945« See Tax Exemption of Annuity payments under
QXyíÁ Service Retirementfl Hearing before the Committee on Finance,
U*S* Senate, 79th Cong*, 2nd Sess*, on H*R* 2948, February 28, 1946,
Po 30*

- 7 ~

2«

Taxable groups

In 1945 about 85,000 retired Federal Civil Service employees
were on the pension rolls, the average pension being about V370.
Retired State and local government employees numbered about 208,000
in 1945 , their pensions averaging about ''8 5 0 . In addition, about
560 ,0 0 0 annuitants were reported by life insurance companies in
1945, the average annuity being about ^360. No reliable figure
is available for the number of pensioners receiving payments under
industrial retirement plans of various types. 1 /
■ Less than 900. or-1 percent of some 85/000 Federal Civil
Service annuitants have annuities in excess of '2,000 annually. 2/
By far the most numerous size of such »annuities is -1,200 annually,
which is the exact amount received by about one—third of the Federal
Civil Service annuitants. 4bout three— fifths of ail Federal Civil
•Service annuities are-less, than-this amount. 3/'
3.

Retired inactive. Army andiNavy personnel .

The a.vaila-ble .informaiion relating, to numbers-of retired inactive»
military personnel and thè amounts of- their retired-pay, based on
estimates for the fiscal year 1 9 4 7 / £*'re suiiaiarized in the following
-table.:
. >1 . • -l
•
.7 ‘-r
>i •

1/ See Table 8 . It should be noted that to tho extent Governmental
or private industrial .pension plans involve group contracts with
life .insurance companies, industrial retirement pirn annuities
would, be included in the insurance company figures.
\2jf it is thus .apparent that exemption from, taxation of the -first
'*1 ,4 4 0 of annuity or pension income combined, v ith the present
exemption levels approximating ^'550 for single persons and
$1 ,1 2 5 for married couples under.the Form 1 0 4 0 ..tax table would
..' eliminate from taxable income virtually all Federal Civil
Service -retirement income. ' .
3/ fhe distribution of Federal Civil Service retirement annuities
by size classes, as of the end.of the fiscal year 1945* is
.shown ir) Table 9. ,

_

g „

Humber of retired inactive Army and Havy personnel and
amounts of retired pay, revised estimates for
fiscal 19^7

♦
«
«
•'
//"il •
Army
. ; 1 .$ • "
Officers 1
■;: ...
Warrant officers
Hurses ■
Enlisted men
Total

' >■

: Retired oh-account
. of dis ability

«
•

Amount
;• (in .
Humber /
millions)

6,129
... 967 '

1 ,2 9 2
1 9 ,0 0 0
22,042

«

i*
Average
*-• • '

$123.3 % ■
2 ;0.
’ 3>1
• 3 2 ,1 .-

60*6

$.3,762 •
‘ 2^086
:i'.69 a
2,159

Havy
Officers : ..
9 > 3 5 1 ; ' • 34*20. ...
3,722
.Enlisted men" .
1 5 ,7^2
. 1 ,4 3 2
2 2 .6 k '
Fleet reserve,
lb- and 20-year .men . 14,190 '
■ 2 2 .6 5
''
1,596
Hurses '
,
I423
*2 6 .
2,034
Reserve officers^
*02
'3,033
Reserve enlisted men ;
44 ■
.0 6 :. . * 1,434
■".Total

•

Total Army and
Havy personnel

• 39J57

67,805

21*03 :
i4i «6

' 2 ,0 3 2

2 ,0 2 2

•Percentage
*of retired
•

ii Humber

4 ,0 4 5
302-,
1,254.’.;
7,30013,727

•:

65$
4o
92
39
I19

7 ,5 0 0 a /

20 a/

n».. a.

ZX•

n.-a.
400
-n.. a*
n* ■a.

M

cLé

n* a«
90 a /
,n. a.
n, a.

7 , 9 0 0 0 / " 21 b / '
2 1 ,6 8 7

d/

57 w

a / P re1 iminary r ough estimate,
]>/ Excludes all llavy enlisted men clliQ. Ì'ioìlV^ reserve per:
sonnel.

rcesi

n. a.

Hearings before the Subcommittee of the Committee on Appropriations
House of Representatives, 20th Cong,, 1st Sess., on First Deficiency
Appropriation Bill for I9 I47 , pp. 3 6 2 , 3 7 0 , 372; Budget of the
uniteci^States Government for the fiscal year 1946, p. 65 I; and in­
formation supplied by the War ana Havy Departments*

Hot available.

- 9 -

The data for fiscal year 19^-7 indicate about 68,000 retired
inactive Army and Navy personnel receiving retired pay totaling
$lh2 million annually.
The average annual, payment per individual
in this group amounts to about $ 2 ,1 0 0 .
Of the total number of:military personnel receiving retired pay,
about Í5 ,5 0 0 are .commissioned officers, '
•receiving 1average annual payments
of about $3 ,7 5 0 per individual. In the'retired officer group, from 65 to
'80'percent are retired on account of disability, and their benefits are
therefore exempt. i/ A very high proportion of retired Army and Navy
nurses are also in the disabled group. It appears that less than onehalf of the retired noncommissioned officers and enlisted personnel in
the Army are on the retired list because of disability. Comparable .in-*
formation for the Navy is not available.
C.

^Future magnitudes

As social security and various other pension programs attain
maturity under existing coverage 'and benefit provisions, the number of
•individuals' ahd amounts of income affected will increase. Consequently,
it is necessary to consider not only the amounts and numbers of individuals
involved in’ current pension and annuity payments but also the prospective
future magnitudes. A full discussion of future trends in the pension and
annuity field is outside the scope of this study. However, the growth
factor in existing programs is illustrated in the following table which
summarizes some available data with respect to the social, security old— age
and survivors*'insurance and railroad retirement programs.
Increases in
coverage and the level of benefit payments would increase the magnitudes
indicated in the table*

110
'10

•
'
: Humber of

t
:

rbenoficiaries:
(millions) :

:
9

-

. 9

Social security
I9 H 7
i960

1 .7 a/
5 to 6
d/

Railroad. retirement .
•V ' 19 U 7 .
I9 6 0 .

*2 a/
not available

Re serves
Amount''
(billions)

$8 . 7 13/
33 to 52 OJ

VS- To/
2 to 3 f /

:

'

0

Annual' interest
(millions)

$ 163 0/
650 to 1 ,0 1 0 oj

2b cj

Hv

52 to 57 f/ '

Total
19^7
i960

1*9
not available

. 9.6
35 to' 55

187

702 to 1 ,1 0 7

Hot-e:: On account of rounding, figures will not noccssarily add to "total's*
Sources:.
*
'<
'•r* ^
a/:' As of February* See Table S, Appendix A for source,
b/ As of Hay.- See Ually Statement of the United States Treasury for June
'
1 6 , 19 ^ 7 , pp* .13 - i C
“
c/ Estimated for fiscal 19^7* 'See Budget of the United States Govern­
ment for the Fiscal Year Ending June 30, 19^3» Table b% p. A7*
•d/ Issues in Sooial Security, Report to the Committee on Ways and Means,
House.of Representatives, 79th Cong*, 1st Sess., by the Committee^
. Spcial Security Technical Staff, 19^+6, Table I, p*. l 6o. Figures as
of end of year*
- . . ■:
Ibid** fable IV, p* 162, and Table F, p. 175*
».
£/ Railroad Retirement — Hearings Before the Committee on Interstate
and Foreign Commerce, House' of Representatives, 79th Cong*', 1st
Sops,, on H. R. I3 6 2 . Part 1, pp* 53-62* The data arc contained
in Tables 7-1Q of testimony of Mr. Latimer, Chairman of the Rail­
road ,Retirement Board.

sJ

‘4

- Il- -

III*

Problems aftd Is s u e s 1 under -present law

•- A*.
___

The V percent. annu ity yu le
1^

Siimmary o f p ro v isio n s

.

/ r & tfttfôr fe a tu r e o f ,th e t r e a t ^ f t mmït%es under th e in d iv id u a l
■ incbme" ta x i s th e -so^cpllpd 3~Percen ^ ru le» adopted in 193^* P r io r to
19314., •a n n u itie s were in général ë x c lu d ib le in t b e i r e n t ir e t y u n til....
c a p ita l was recovered« 1_/ The p resen t r u le was designed to ta x c u rre n tly
’sbine p o rtio n o f eacH.aniiual annu ity payment in order to avoi.& upd\ië
postponement o f tax,\ while. :excluding the. "balance in o rd er to .provide fo r
th e t a x - f r e e re tu rn o f p r in c ip a l« 2 / Under th e r u le , each annual amount
paid i s included in ta x a b le incone to th e exten t o f 3 .PQrcent o f .the
co n sid é râ t io n paid f o r t.he annuity i
s The b a la n ce o f each, apriüàl^ payment
I s excluded u n t il th e t o t a l amount excluded over a p erio d o f tim e i s equal
to th e co n sid e ra tio n * U/ T h e re a fte r * th e e n tir e annual annuity payment is

l/

Under th e 1 9 2 ? "and subse quent r eyenue a c t s , annui t y paym ont. s Ver e
—s p e c i f i c a l l y exclud ed in P th e ir -e n tir e ty from g ro ss in c o m i^ in til
___ . c o n s id e ra tio n was recovered (Sec* 2 1 3 (b) ( 2 ) under Revehup'-Act o f
19264 "Séc* 2 2 (b) (2 ). under Revenue Acts o,f:192S;..and .1932 );«' Priorato
1 9 2 6 , various revenue acts contained a general provision.under which
■

%

the amount received ,fas.'a xeturn of premium^or premiums paid^ under
áh-annuity contract was- excluded from gross income (Sèc* 213(b)- (2)
under Revenue Acts of 191$» 19P1*
192 ^)* In general, this -pro­
visión was applied 80 as to exempt, animiti.es- until the total amount
• received equal led premiums paidj .after /whicih. the annuity, was fully
taxable*
In- some cases before 1926, however:» annuity payments,, were
treated, as consisting;partly of interest- and partly of return of
principal ,* as. d et ermined on, jbhc -basis, of. aotuari.al. compútat ions * See
Revenue Revision'of 19 3H , Hearings before the^bpmmit'.tce on Uavs and
Means, 73rd Cong. » 2nd Soss:.) pp* lUa-lkj;- also S.M, 3U 3U., C.B. IV-1,
'Í 9 2 5 , p* 29 » cit ed in The -Taxai ion- of -Pensions and. Annhxt i es, areport oh Ú.R-o 29^S, 79th- Cong«, 2nd Sess., p* 32# •

2/

Sae- P rev en tio n o f Tax Avoidance,,' P re lim in a ry Report, o f a Subcommittee
o f the' Committee on Ways." and:Means,,. IR 33,- rep rin ted , in 'Revenue Revision
o f 193 U/ H earin gs‘ b e fo r e th e Committee-on Ways and. Means, 73 rd Cong.,
2nd S e s s * , p* 133®
1/?here an annuity i s payable during only p a rt o f a y e a r , th e amount
included i s 3 p ercen t o f th e c o n s id e ra tio n m u ltip lie d by th e number 0
months i t was paid divided by 12«
Amounts excluded p r io r to 193^ a re deemed e x clu sio n s from g ross income
fo r purposes o f th e 3-,p ercent annu ity r u le . In th e ca se o f an n u ities
received, hy S ta te and m unicipal employees p r io r to th e 3-939 P u b lic
S a la ry A c t, amounts which would be counted as e x clu sio n s under th e
annu ity p ro v isio n s axe tr e a te d as su ch, even though otherw ise exempt
under th e th en p r e v a ilin g treatm ent o f S t a te and l o c a l government
em ployees 1 compensât ion*

11
12

-

includible in taxable income# ^'However, no tax adjustment i a -allowed .in
thèse cases where the annuitant dies "before he has recovered his entire
capital consideration tax— free* 1J If -the annual annuity payment is ,not
more than 3 percent of the consideration^ the entire ¡amount is included
iri taxable-income and nothing is 'excluded* 2J
Contributory employee annuities (that is, pensions financed partially
"by contributions from the employee^ wages) are treated as annuit ies jsub­
ject to the 3 ~Percent annuity rule* 3./ the consideration being the employee’s
contributions plus any amounts contributed by the.employer which were pre­
viously includible' in thd employee’s taxable income# U/-

2»

Problems
a#

Inadequate allowance for return of' principal

The. 3-^-percent annuity rule tends to overstate the income, element in
pertain annuities', resulting in the taxation of •capital. The purchaser
of an immédiate 5 / annuity for life at standard commercial premium rates
without employer contributions, for- example, cannot recover his capital
outlay free of tax Unless he lives substantially beyond, his life, .expectancy
at the time of purchase« Moreover, in extreme instances, the annual annuity
payments may be less than 3 Percent, of the consideration, permitting'no
exclusion whatsoever for the tax-free return of capital# This inadequacy
of the 3~percent rule results from;two factors« In the first place, the
principal under an annuity investment is steadily depleted during the
period of payments# Consequently, -the average rate earned annually as a
percent of. the original investment-, is about one-half thé net earnings
rate on annuity reserve investments»
Secondly, the 191+5-net rate of
interest earnings of life insurance companies in the United. States on
their invested funds Was 3»07 Percent, or one-fourth less than the
a-

2/

i f

I#T. 2 9 1 5 , C.B. TIV - 2 <1935)» PPo 98-99* I > . 3364 , C.B. 19.40-1, p. 1 9 .
It may be noted that almost half of the States le-vying income taxes
have adopted the Federal 3~Pe*,cent rule* The rest generally apply the
pre~193l+ rule# For a detailed discussion of State annuity provisions,
see The Taxation of Pensions and. Annuitics, op» cita t Appendix A,
PP* 25-31»
~
A partial exception should be noted in the case of distributions from
a:h employee’s trust prior to 19^+2» Such amounts are taxable oniy to
the extent they exceed, the amount paid, in by the employee*
Sec# 1 6 5 ,
I*R#C,, before amendment by the Revenue Act of 19 I+2 .
Secs» 2 2 (b) (2 ) (B) and 165 (c)«
An immediate, as distinguished, from a deferred annuity is one where
payments begin immediately after purchase of the contract«

- 13 -

average earnings rate for the decade 1930— 39
U o10 percent 0 1J In
contrast with the 19^5 earnings of 3 percent and the indicated downward
trend, the net rate of earnings on annuity reserve investments would need
to he 6 percent for the average purchaser of an immediate annuity to obtain
the contemplated tax-free return of cpaital» At the time of enactment of
the 3 -percent rule in 1 9 ^ , it was recognized that the 3 percent would
merely approximate the interest— earnings elementc However, it was felt
that the 3-nercent figure-was consistent with the objective of including
some reasonable portion of each annuity payment in gross income in order
to prevent undue, postponement of tax« 2 /
Illustration 1« immediate annuity« A man, aged 6 5 , buys an immediate
annuity for life« On the basis of current insurance, company premium rates,
the nremium is $1 0 ,0 0 0 for an annuity of about $750 a year# payable on a
moAthly basis, without refund, at death« The 3-percent rule requires such
annuitant to include $300 in his taxable annual income and to exclude
$b-50 each year for the first .22.years«-- However, his life expectancy,
according to the 1 9 3 7 .Standard Annuity Table, is.lU.U years« Thus, he
would not obtain tax— free recovery of his consideration until the 23 rd
year, or approximate£y B years beyond his life expectancy« Jy The
resulting overestimate of taxable income from immediate annuities and,
taxation of return of capital, discriminates against such annuities and.
constitutes a substantial tax barrier to this form of Investment«

TJ life. Insurance 19^6 Pact -Book, Institute of life Insurance, lew York,
_

2J

3£i_

•

'

;;

The problem of obtaining tax-free return of capital was anticipated
in.l93 U by both Treasury and insurance company representatives*
See
Revenue Revision of i.93U, ’Hea,rings_ before .the -Ways and Means Committee,
73rd. Cong«, 2nd Sess«, ,pp« 1^2-1^, and 552 - 5 6 9 ; also Hearings before
the Senate Committee on Finance, Revenue Act of 19 3^# PP® 119—120«
Assuming that he also has $550 of other income (the minimum amount
subject to tax for a single person with no dependents ,
under present
v law Supplement T tax table), he would, pay tax on $U3500 of income
over a period, of 15 years, or substantially more than he would, pay
if he invested. $1 0 ,0 0 0 in bonds at 3 percent and cashed or marketed
enough bonds each year to furnish $750 annually from principal and
interest* Although the purchase of bond.s would avoid the indice.ted,
tax disadvantage of an .immediate annuity, it would lack the insurance
protection of the annuity, in the event the individual lives beyond
his life expectancy*: In this context, the 3-P^rcent rule may be
said to tax the purchaser of an immediate annuity for the privilege
of assuring himself a minimum income- in the event he'lives beyond
his life expectancy©
•

Overstatement of i'ncoifie.*under the; 3~psrcent”rule is ’usually avoided
.in the case of deferred-or employer—financed annuities©
I n these cases
-.-accrued'-int erest,1and employer contributions ordinarily- accdunt for such
a-large portion of the annuity :payments ..that t h e ‘3—percent rule does not
overestimate the income portion of the<annuitantfs receipts©
111
ustrat Xon 2© ,Deferred annuity© A-men at the age of 40 purchases
a deferred annuity of $750 yearly, payable on a monthly he3is, to begin
when he is 65 « Provision is made for refund«a:t death before "but not after
6 5 « The consideration, computed as a single premium approximating the
rate which would now he charged by an/.insurance company, is about $6,000,
His life expectancy at 65 is l4?4 years«» When payments begin under the
.3-percent rule, he 'includes $18Q in his gross income for the first 10
years, excluding $570 each year© Such annuitants can recover their entire
consideration m the. rll-th year -(about 3- years' before attainment of the
life expectancy a t -6 5 )© after which the payments are fully includible
•in taxable- income* 7 ■
' -^-iusirat ion -3» Contribute1U T 'empioyse;armuity© A retired school
teacher under-a retirement plan partially financed b y employer contri­
butions retires with a life- pension of .$ 9 0 0 a year, toward which she has
contributed about $1,'-S00, ’Life expectancy at time of retirement is 24
years, . Under the 3~Perc,
ent rule, $54 ds included: in gross income and
$846 is excluded for the first -2 years.
In the 3rd year $792 is included
on which she would pay $4q of tax under the. tax table, if she has no de­
pendents© Only $108 is excluded since this makes the total amount ex­
cluded equal to the annuitant’s consideration© Thus, in the 4th year
her entire annuity income of $900 becomes taxable and she is liable for
~
$6l of tax* As indicated by:the illustration, the annuitant und.er a
contributory employee annuity recovers'his consideration tax— free well
within his life expectancy©
b©

Income distortion under the 3-percent rule

.Uven where the 3-P<?rcent formula provides adequate allowance for
tax-free return of principal^ it introduces an artificial fluctuation 'in
taxable income which may seriously distort the measurement of the annuitant’?
income and taxp^fing ability© This income distortion is characteristic not
only of
present
law and the pre-1934 annuity provisions, l/ but also of
any^(percentage— inclusion) rule which prescribes the inclusion in income of
a fixed percentage of'the cost-of the annuity©. -This problem is particularly'
serious in the case-of. low-income annuitants,: Thus, where the includible
portion of the annuity, computed as 3 percent of consideration* together
with any other income,.-is less than the annuitant’s personal exemption and
deductions, some.or all of the amount excluded as tax-free return of capital
would be nontaxable m any event*- In these cases, the exclusion for return
of capital overlaps the amounts allowed for personal exemption and deduction?-

H

The pre-1934 treatment produced the same type of income distortion
but to an even greater extent since, under it all of the annuity was
first excluded.

- 15 -

with a resulting wastage.or*failure to obtain full, tax benefit for one or
the other of the allowances« l/ Such annuitants-would pay less tax if, |
instead of ^bunching” their tax-free recovery of capital in a' few early
years, they were allowed to spread' their exclusions over.a longer period*
If the annuitant in Illustration 3 Were permitted to include $5^9 2/ of
her pension in taxable income each year and exclude $ 351 $ this would spread
-the period- of capital recovery into the 6th year* Thus, she would "be exempt
from tax, assuming she has no other income, for 5 years, as compared with
2 years under present law*
c.

Other Problems
0)

los if8

short-lived annuitants

It is claimed that the present annuity provisions are unjust in that
they require the annuitant to report a part of his receipts as taxable in­
come without allowing for appropriate adjustments- for annuitants who die
before recovering the entire capital consid.era.tion tax-free* Since the
entire receipts of annuitants who live long enough to recover their capital
tax-free are fully includible in taxable income for annuitants as a group
a larger amount .of receipts i® included. In taxable income than the amount
of income they actually realize» In this connection, it is urged that the
3-Percent rule is less satisfactory than the ure-193^ rule, since the latter
did not treat any portion of annuity receipts as taxable until principal
was recovered*
(2)

Complexities

The present 3~Percerv*:: rule Is not entirely satisfactory in terms of
compliance and administration, since the' amount of annuity receipts which
must be included, in taxable income changes as the capital consideration is
recovered tax-free^
Illustration U 0 Three different levels of taxable income under an
annuity» An individual receives an annuity of $1,000 annually, the cost of
which was $10?000* First , he includ.es $3^0 in taxable .income and excludes
$700 each year for lb years* Then, in the 15 th year, he includes $£00 and
excludes $200* Finally, in the l6th and all subsequent.years, he includes
the entire $1,000 in income*
The reporting of annuity income under present law-requires computation
and. cumulative record-keeping by the taxpayer which might otherwise be
avoided* It involves a number of entries with respect to the cost of the
annuity, amounts recovered tax-free in prior years and remainder yet to be
recovered tax-free, and the amount received in the current year and the
portion thereof to be included in taxable income*
i/

2/

It should'be noted that the wastage of personal exemption, etc* is
only an extreme form of tax discrimination, against irregular income
under a graduated, income tax*
Maximum amount of adjusted gross income not subject to tax for a single
individual with no dependents under the present law Supplement T tax
table*

113
- l6

In a field as complicated as the treatment of annuities, involving
the segregation of income and capital elements, some misunderstanding and
confusion on the part of some, taxpayers are probably inevitable# The
underlying concepts .and purposes of the 3~*Pe**cert rule are not complicated#
However,...there appears to he some taxpayer misunderstanding of the signif­
icance, of t h e .^-percent figure and its method of application#
B*

Special exemptions

'Pensions, annuities, and retirement pay in general are includible in
taxable income either in their entirety or to the extent provided by the
3~pcrcent rule, where applicable# 1 / However$ certain classes of pensions,
annuities, or retirement benefits are exempt#

1#

^ e m p t classes
a«

Social security an^ railroad retirement pensions

Pensions paid to retired employees hand er the Pail road P.etirement Act
are exempt by specific provision of the Act# Zj Social security old-age
and. survivors ? insurance benefits have, been interpreted to be similarly
exempt b y treasury ruling# 3 /
b„

Compensation for injuries or sickness
and, d isabil ity r etir em ent pay

Amounts received, through accident or health insurance U/ or under
w o r k m e n ^ .compensation acts, as compensation for personal, injuries or
sickness„ as well as amounts received as damages' whether by suit or by
agreement, and amounts received, as a pension, annuity? or similar allowance
for-personal- injury or sickness resulting from active.service in the armed
forces of.any co.untry, are exempt# 5 /
*
The military retirement pay of regular Army and Bayy personnel retired
on account of physical disability is exempt under Section 22(b) (*>)# How­
ever», the ordinary ret irem’
r nt'pay1 of regular Army and B’
avy personnel is taxable»
Under civilian retirement pension-' plans * pensions paid'where ret irement
is on. account of disability are generally not treated, differently from
ordinary retirement Pensions# However, in some instancesdisability'
'
1/

2/
3/

zJ
5/

Ordinary pens ions f inanced' -ent irely by .the- employer and paid as. .wages in
consideration of past employee, services are like wages or other remuner­
ation for personal services«, As such, they are includible in gross in­
come under the general definition of ngross incomett under Sec 0 2 2 (a)#
However^ pensions paid under employee pension or annuity plans are class­
ified as employees 1 annuities taxed subject to detailed rules set forth
in Secs# 22(b)(2)(B), 23(p), and lfe(b) ande(c)# ‘See ais o App end ix'B 0
See also l'#T, 3 0 6 9 , C.B, 1937-1,
39#
i .t # 3^ 7 , C»B# 19hl-l, p # 1 9 1 0
Excepting, amounts attributable to, and not in excess'of, medical expense
deductions under Sec# 2 3 (x) in any prior year#
*
Under Sec# 2 2 (b)(3 )#

17 retirem en t payments q u a lify under th e terms o f th e re tire m e n t p la n as
exempt compensation* 1 /
co

Pensions which a re g r a t u it i e s

So -called , p e n sio n s, awarded "by one to whom no s e r v ic e s haye "been
rendered^ a re deemed g i f t s o r g r a t u it i e s and as such a r e not s u b je c t to in­
come t a % 2 / However, pensions paid, to "b e n e fic ia r ie s o f a deceased employee
"by an employer und.er c e r t a in co n d itio n s do c o n s t itu te ta x a b le income to the
b e n e fic ia r y * 3J Examples o f pensions considere?. to b e g r a t u it i e s are.
b e n e f it s paid b y .th e In te r n a tio n a l Typographical Union Pension Fund, U/
and p o rtio n s o f te a c h e rs * re tire m e n t and su rv iv o r pensions sponsored by
th e C arnegie found ation f o r th e Advancement o f T each in g , 5 /
2«

E q u ity and revenue c o n s id e r a tio ns

The e x clu sio n o f s p e c ia l c la s s e s o f retirem en t payments d.iscrim i— t
n a tes a g a in st o th e r a n n u it a n ts ,#r e t ir e d persons liv in g on i n t e r e s t o r
o th e r investm ent income, e ld e r ly people who a r e , s t i l l working f o r wages*
as w ell as taxp ay ers in g e n e ra l* In s o fa r as- th e s e exempt payments a re
financed, by employers they a re * in e f f e c t , d e ferre d wages comparable to
re tire m e n t payments derived from employer c o n trib u tio n s under p r iv a te
pension plans* To th e e x te n t th a t th e b e n e f it payments rep resen t employee
p a y ro ll ta x c o n tr ib u tio n s , they a re analogous to th e c o n s id e ra tio n paid fo r
retirem en t b e n e f its by r e c ip ie n t s o f ord inary employee a n n u itie s * The .
p o rtio n o f b e n e f it payments which i s a t t r ib u t a b le to Government g ra n ts may
be regarded as s im ila r to p u b lic w e lfa re payments o r g ra tu ito u s pensions#
The d is c r im in a tio n in h eren t in exempting th e e n tir e amount o f r e t i r e ­
ment payments i s p a r t ic u la r ly s t r ik in g in th e ca se o f r a ilr o a d retirem en t
pensions and. s o c ia l s e c u r ity old—age and. su rv iv o rs* s.>cnefits* The ex­
emption o f $l,HUo o f r a ilr o a d re tire m e n t pensions had l i t t l e p r a c t ic a l
s ig n if ic a n c e when enacted in 1 9 3 5 » p erso n al exemptions were $1,0 0 0 f o r a #
s in g le in d iv id u a l and $ 2,500 f o r a m arried couple w ith a 10 -p e rc e n t earned
income c r e d it a g a in s t th e normal ta x and. th e s t a r t in g r a te was H percent#
Under p re sen t law , however, th e exemption is s i g n i f i c a n t , s in c e th e p e r­
sonal exemptions a re r e l a t i v e l y low and th e s t a r t in g r a t e o f 19 p ercent
i s alm ost 5 tim es h ig h e r than in 1935# Consequently, th e r e c ip ie n t o f
an exempt $l,UUo r a ilr o a d re tire m e n t pension may be viewed, as r e c e iv ­
ing a cu rren t ta x advantage o f $151 I f s in g le and $56 i f m arried
(w ith no dependents and. no o th e r income) compared w ith s im ila r ly situated.
\J

2J
3/
5/

5/

For example, some payments made from c e r ta in ty p es o f funds e s ta b lis h e s
by m u n ic ip a litie s which a re paid, only as a r e s u lt o f d i s a b i l i t y due to
i n ju r i e s re ce iv e d in _ lin e o f duty, e t c , may be tr e a te d as exempt under
S e c . 2 2 ( b ) ( 5 )# ‘
^
:/
.
R eg u latio n s 1 1 1 , Sec* 29 # 22 (a ) —2 a
I . T . 3 SU0 , I,R ,B * Hoa
19^7-VPP# 2 and 3*
See Tax Exemption o f Annuity Payments under C iv il S e rv ic e R etirem en t,
Hearing b e fo re the_Committee on F in a n ce, U.S* S e n a te , 7 9 ^ Cong», 2nd
Sess© , on H.R© 29^ , February 2 S , 1 9 ^ 6 , PP* 30-3^«
L.0© 10U0, C.Ba Ho, 3» 1 9 2 0 , p* 1 2 0 ,

11 4
- 18 -

annuitants who must include the entire $ 1 ,UH0 in taxable^income,
social security payments by themselves- are below personal exemption levels,
except in rare cases, instances where the Recipient has otner income ma
become fairly numerous, especially where payments from private industrial
pension plans are made in addition to those from social security old-ag*
and survivors 1 insurance.
Questions may also be-raised with regard t
the equity of exempting certain pensions which-are classed as gifts.
Specific mention should be made of a number of points- raised by the
treatment of disability retirement payments in both the military Jna
civilian fields. Inequalities appear to 'exist within the líela of., will
tarypensions owing to the taxation of ordinary retirement pay ox regula
Army and Havy*Personnel and exemption of similar payments on account ol
disability. ifi Of a total of about 68,000 regular Army ana a a y personnel
now in retired and inactive status, a high proportion are retiree, because
of physical disability. 2 /

. . ..

In the military field, the results may often be anomalous since dis­
ability for purposes of military service may not always involve signifi­
cant d i s a b i l i t y o r civilian employment. '3/ Substantial tax;advantages
mav be derived by retired Army and Navy personnel whose d i s a b i l i t i e s ^
relatively 'small by civilian employment standards. Moreover, signixicant
inequalities may arise, for example, as between 2 retiren oiricers wi
the same income and family circumstances, where both are tne same,ag* and
equally disabled, but one was retired prior to retirement age aue to dis­
ability and the other•retired on account of^superannuation ana later devel­
oped the -disabilities commonly associated with -advanced, years.
While comparable inequalities may not be encountered in the field of
civilian pensions, questions axe raised with regard to tne rationa Gun erIving the exempt ion of disability p a r e n t s under Section 2 2 W i ? J .
A ne.
exemption of amounts received through accident or health insurance, or
under workmen*s compensation, acts, for personal inyi-^ or sickness, or a
damages on account, of such injury or sickness has been provided \xrAet
every revenue act since 15IS. The 1512 provision, specifically exempting
such amounts, was apparently designed to renové existing douots whetner
they would constitute income for tax purposes under then preval- m g concepts of taxable income. U/ The exemption of disability payments provide
under Section 22(b)(5) is based on type of payment rather than^on the disabilitv of the recipient as such. Consequently, the question is raised
as to the basis for the difference in treatment under the income tax which
'is accorded to employees whose disability retirement pay does no„ qua l y

1/

M

í

, SQth Cong., 1st
In this connection, it may be noted that H.B. 21
regular
retirement
•Sess., would exempt the first $ 1 ,5 0 0 each year o
pay of—nilitary and naval personnel.
^
For more detailed information regarding numbers of RetiredArrny ana
Havy personnel, see Section IV, below> ana ¿able 8 , Appendix A.
The Taxation of Pensions and Annuities, op. cit., p.
See Report'of Ways and Means Committee, o5tn Cong., 2.nd
(-oUoe
Report'7p 7 , pp. 9-10.

-

19 -

for exemption under Section 22(T>)(5). lJ Moreover, it is sometimos urged
that a case for the exemption of disability payments cannot be mace unless
similar exemption is granted to all disabled persons regardless of source
of ineome„2/ In this connection, it should be noted that proposals have
been made to provide a special exemption for handicapped persons similar
to the $500 blind deduction provided under Section 23(y)*
Problems have also arisen in.the interpretation and application of
this section to civilian disability payments, p a r t ic u la r ly in the case
of municipal and public'employees* I t is often difficult 0 e erm ne
whether a particular payment meets the tests laid down by the sta u e®
For example, it may-be difficult to ascertain whether a particular pay­
ment is compensation for injuries or sickness in the nature of i*orkmen
compensation or damages or whether it is a-retirement nens on or oen
in consideration of employment and the employee s.contributions
fund, the employee's disability being merely one of the incidents con­
nected with bis retirement or receipt of benefits,
Where the exe.ption of disability payments hinges on distinctions of this character,
disparities and anomalies necessarily result®
The revenue losses directly resulting from the existing^ exemptions
appear*to be small at the present time in relation to total income ax
yields® i/ Assuming income payments of $l 66 billion in calendar lj 7?
is estimated that the exclusion from gross income, of social security
old-age and survivors» insurance benefits results in.an annual revenue
loss of about $23 million® Similarly, the exclusion of railroad retire­
ment pensions is estimated to cost about $10 million® By 19_,7s . lS f
estimated that the exemption of social security old-age and survivors
insurance m i l cost about $ 7 ^ million and the exemption of railroad
retirement pensions, about $i 5 million, assuming the same level of
income payments, present law rates of tax and personal^exemptions®^
Thus, revenue losses due to these special exemptions will tend to m e r e
along with the maturity of social security and railroad retirement program »

¥

U
3/

UJ

H.B. 267 B 5 SOth Cong®, 1st Soss®, would eliminate this difference am° g
employees of State.and local governments by exempting disability pens
of such employees® 'See‘Hearings before the Ways and Means Committee on
Miscellaneous Bills, pp* 217*~219o
.
..
*
Watson, A® Bo “Income Tax'on Annuity Payments,” Transact ions, pctuap-_.
Society o f .America, 19^-0, Vol* XLI, Part 1, Wo® 103, P© 31* footno Q*
H o e v e r , it should be noted that the author also points out that he ao
not believe a good case can be made for such general exemption for
disability®
■
.
Sickness disability benefits and disability pensions (other than 10T
accidental injury in the course of employment) under a company— emp 0
mlan have been interpreted to constitute taxable income® However, a
dent disability benefits under a plan which expressly próvidas tha
employee may elect to accept benefits under the plan or.to prpsecu ,,
claims are considered exempt as damages received by agreement 9 l-»1* ^
C®Bo 1939-2, p® 1^9, and G-.C*M® 23511, C®B* 19^3* P*
.
The estimates of revenue effect cited in this report were prepare l |
early summer of 19^7 on. .the basis of the unrevised national income
of the Department of Commerce® For the statistical and conceptúa
differences between this series and the new series on “personal
-e|i
see national Income Supplement to the Survey of Current B u s i n e s s y W j

115
-

20

-

If provision were made for the extension of a $l,UHo annual exclusion,
applicable to all kinds of pension and annuity- income* it is estimated that
present law revenues would'be 'reduced 'by'an additional $32 million in 1 9 ^ 7 *1/
A $1,UU0 pension exclusion in combination with regular personal exemptions
and deductions would, raise, the effective income exemption-to- very substantial
levels for these individuals, For example, with the $l,UUo exclusion super—
imposed on the present law personal exemptions' and deductions, individuals
with at least, $1 ,HUo of pension income would' not be subject to Federal
incornò.tax on incomes up to $1,99^ in the case of single persons and $ 2 ,5 6 5
in thè case#of married couplese
x
3,

Proposals to create additional exempt classes
a,

Pension and annuity exemptions

The existence of soeciol exemptions for Particular pension groups
•is a constant irritant encouraging demands for similar treatment of
other pensions and annuities.
In the 79^- Congress, a considerable
number of bills were -introduced which would provide .special, exemptions
applicable to one or more classes of pensions or annuities. A n -important
example is'K,E* 29 ^ 8 7 9 ^ Congress, 2nd Session, which-was to exempt
the first $l,HUo of Civil Service retirement annuity payments;in any
ÿear® Although opposed by members of the. Ways and Means Committee,

H, R, 29^-6 was passed, by the-House o f R e p re se n ta tiv e s September 2 7 , 19^5«
and referred to the Senate Finance Committee, The Treasury Department opposed?
the measure and also recommended that social security oid**age a n d survivorTs
benefits and railroad retirement pensions be'made subject to the generally
applicable revenue laws» Public hearings were held on the bill February; 28,
19^-6* 2J At.the request of the Senate .Finance Committee, the Staff
'•of the Joint.Committee on Internal Revenue Taxation prepared a report
•on.H,R, 29 ^ 8 , .This report was unfavorable to the-proposed exemption,
A number of similar measures have been introduced, in the
I. /

Under H,R, l6 l'3 , 80th Cong,, 1st S e s s , , a $1,H^0 annual e x clu sio n
would be granted applicable to the retirement pensions of all govern­
mental employees, including retired employees of Federal, State and
local governments or their agencies. It is estimated that this legis­
lation, if enacted, would reduce revenues about $9*5 million in 19 ^ 7 »
Proposals for the. exemption of annuity payments of retired Federal
Government.employees arc sometimes made as an alternative to an
increase in annuities to take account of higher living costs. Similar
exemptions for.State and local employees might also be regarded as a
means of relieving the. burden of an upward adjustment of .retirement
pay on State,-and local governments,
»

2/

See Tax Exemption o f Annuity Payments under C ivil" S e rv ice ' R etirem en t,

HE* erb,
¿7

The Taxation of Pensions and Annuities, op, cit » , p, 1

SOth Congress, l / •

21

-

Id *' Special;-age exemption, in lieu of retirement
income exemption
, H.H* 1 (SOth Congress, 1st Session) .the individual income tax re**
'¿action-measure, applicable to incomes received.in 19^7 and 19^-8 and
later years* 2/ provided, a special ^00 exemption for persons .over $5
years of age* 3 / It is estimated that the age exemption would reduce
the income tax liability of 2,9 million persons of whom 995»000 would be
inade nontaxable. The revenue reduction under H*E, 1 attributable to this •
feature is estimated get '$227 million for calendar I 9 U 7 and.at $196 million
for calendar 19 ^-S, 'a-ssuming, $lo6' billion income payments*
As reported by the ¥ays, and Means Committee and.passed by -the House,
the age provision was- coupled with a limitation'requiring persons otherwise qualifying for the age exemption to include in their gross income
the first $500 received each year from.fully exempt pensions other than

T7

2/

For example’
j''H*;R, 32, SOth Cong., IstSess,, would exempt the retire-- •
ment annuities of State, county, and municipal employees up to $2,000
a year j.-HI.-, 291 and S, 5 8 -would entirely exempt Federal Civil Service,
retirement pensions; H.H. 96 ^ would, provide a special $2,000 exemption ,
applicable to retirement pensions paid to employees of the Federal
Government’ or any State, Territory, possession, or their political
•Subdivisions, governmental corporations, or corporations exempt under,.
Sec*. 101(b) of .the Internal .Revenue Code; H.H, 2180 would<exempt all
governmental retirement annuities'up tc $2,500; H,R. hpS would exempt
the first $1*^40 of any retirement pension or annuity payment;H.H, 73&
would, exempt the first $l,hhO- of Civil Service retirement pensions;
H*H* S55 and H.H* l6l3 would apply a $l,Uhb exemption'to the retire­
ment annuities ox all governmental employees; H.H. 9^3 would entirely .
exempt all retirement benefits paid by Federal* State' or local govern1*
ments*
pj
’
Passed by. the Congress June 3» 19^7» vetoed by the President June l6tj.gk]"
and veto sustained in the House of Eepresentatives J u n e -17, 19^7*
The additional exemption was $1,000 on joint returns where both husband
and wife ai'e-over .6 5 <>.• Similarly, -the taxpayer filing a separate return
was allowed an additional $500 exemption for his wife -if-she. .is over , •
65 and does not'file a.separate return. Ho additional■exemption would
be allowed, for”.dependents- over 6 5 . This superseded the House bill provis ion under which the $500 age exemption was allowed only with respect *
to persons whose gross income was. $500 or more. See Senate Finance
Committee Report on H.H. -1 , Senate Report Ho, 173» SOtli Cong., 1 st
Sess„, p* lp„
..

veterans * belief its or lump-sur» benefits, 1j This limitation was not
included in the Senate bill or in the final measure passed by the Congress.
The Senate Finance Committee stated that it was in complete accord with
the objective of the limitation, but owing to the difficulty of determin­
ing the types of exempt income covered by the provision and the adminis­
trât ive comnlexities it was considered desirable to defer action on ;oxie
problem® The Finance Committee' report indicated that..<the i?^0Q
ex­
emption might constitute the basis for removing existing pension arid
annuity exemptions. 2/
*4^«
Both the Hays and Means Committee anci Finance CommiuT;ee Reports on
H.R„ 1 stated that the $500 age exemption was designed to recognize the
economic handicaps of elderly persons. They m r t h e r stated that the
age exemption was considered a more appropriate method oi relief than
piecemeal extension of the system of exclusions for. particular typés of
retirement income. It was also indicated that the $500 age exemption
was regarded as a method of dealing with the problem of existing dis­
crimination between recipients of $£xable and tax-exempt pension and
annuity income.
With regard to the latter objective, it will be
noted that in the absence of the pension offset provision included in
the original House bill or similar provision designed to bring exempt
pension income within the tax base,, the age exemption tends to superimpose
an additional special tax benefit oh top of that already enjoyed by re-^
cipients of tax-exempt retirement income-. However, it should oe recognized
that the age exemption as adopted under H.R., 1 would tend to reduce the
practical importance of existing inequalities and proDiems in one pension
and annuity field, by dropping many pension and annuity recipients from
the tax rolls and substantially reducing the tax liability of otns.rs.

Ï7

In general, the limitation was designed to reduce the age exemption by
the amount of special pension exemption already enjoyed, but not to
disturb the existing exemption of non— military health, sickness, and
accident benefits exempt under Sec, 2 2 (b)(5 ) °r military and veterans1
benefits oxenpt under provisions of law other than Sec. 2 2 (b)( 5 ) of
the Internal Revenue. Code. Among the types of exempt pension and
retirement income affected by this feature of she House bill are (l) oldage and survivors1 insurance benefits under the Social Security Act, .ex­
cept lump-sum payments, (2) railroad retirement benefits, except lump­
sum payments, (3 ) disability pensions of the regular armed forces and
f temporary officers of World War II, now exempt under Sec.^22(b) ( 9 ) ,
Bavy pensions provided under Revised Statutes, Secs® 475^ &nd ‘7 d 7»
certain gratuitous retirement pension benefits,.- such as tnose paid
„j the Carnegie Foundation to retired teachers and by the International
Typographical Union Pension Fund for retired typographical workers,and
(iS) pensions paid by States to veterans .of various wars* Certain types
of exempt pension benefits not affected include (in addition to lump-sum
benefits under the Social Security and Railroad Retirement Acts) (l/ dis­
ability pensions of emergency officers of World War I,.(2 ) all veterans1
pensions administered by the Veterans Administration, (3) Army and Navy
Medal of Honor Roll pensions, (H) sickness, health and accident benefits
received under workmen*s compensation laws, private health .or accident
insurance, or as damages awarded by lawsuit or^agreement, and (5/ lump­
sum bonuses paid by Spates to veterans of World War Ily
Senate Finance Committee Report on H.R. 1, ojd. cit., -p* loHouse of Representatives Report Wo, ISO, 80tn>Cong., 1st Sessa, p* 15»
Senate Report Bo. 173» op.■cit., pp, -14— 15.

- 23 In so doing, however, it would create'a new and' possibly more important
distinction in thé tax treatment of persons over 65 ' as compared with
other taxpayers. .This feature of H.R* 1 raises' issues with regard to
the income tax treatment of elderly (or- handicapped) persons which are
outside the scope of this study.
C.

Lump-sum payments

1*

Distributions under retirement plans.

•

"where the total amount payable to an employee under qualified
stock—bonus, pension, or profit— sharing employees 1 trust plans JL/is. paid out in the form of one annual, settlement on account of
separation of the employee from service (including termination, of
employment due to the employee*s death), the amount received in
exc.ess of the employee* s contributions is treated as a long-term
capital gain* 2/ This treatment is not available to lump-sum
distributions under non-trusteed annuity plans1. Consequently, •
such ..distribut ions' due to death or severance from ■employment under
non— trusteed plans are treated as ordinary income to the extent they
exceed the employée* s contributions. However, when such distribution
Is made in the form of an annuity contract to an employee, it is not
considered to be taxable income, even though it has cash or surrender
value, unless the employee actually cashes the contract,
Long-term capital gains treatment as applied to lump-sum dis­
tributions of deferred compensation and accrued interest serves to
avoid hardship in the absence of an adequate income-averaging pro­
cedure, However, capital gains treatment may be an inadequate
subst itute--for- income-averaging in some- instances.-and-in-other
cases may provide a loophole for,converting ordinary income into •
capital gains for the purpose:of obtaining preferential tax treatment.
Moreover, capital gains treatment might in some- instances encourage
single-sum settlements in lieu of retirement pensions, thus tending
to defeat the purpose of retirement plans„

2 * Purchase of annuity contract outside qualified plan
By contrast.with the favorable capital1gains treatment accorded
-.certain lump-sum'distributions noted above, the vesting of an annuity
contract in ah employee, f or'example' through the purchase of a single,premium annuity contract outside a qualified plan,, results in the
employee paying -tax on the entire value of the contract as. income con­
structively received in one yea t'6 Employers sometimes find it desirabl
to meet their responsibility towards a retired employee by purchasing
an annuity contract and designating him as the beneficiaryT
T/
2/
3/

Qualified for exemption under Sec.' lo5 (a) •
Under .Sec* 165 (
b
)
'.q
Regulations 1 1 1 , Sec* 2 9 olo5wS,

•

-

2b -

117

Proposals have 'been made to mitigate the impact of the tax on the
employee where the value of such contracts is taxed as ordinary income by
currently excluding,the. value of the contract, from the employee s income
and including the,'entire annuity in. gross- income when received, However* to
allow an employer* outside of a qualified retirement program, to deduct the
entire cost of an annuity contract in one year and then to allow the employee
to include his pension in income as received would virtually remove the
sanctions against unqualified planso 1 / .It would open, hroad^avepues for
avoidance through;loth the timing of such transactions to;;coincino with high
"business, income and tax rates, and theconversion, on a large scale* of
ordinary; .salary compensation into retirement henefits subject to lower
individual, income tax©

3®

.

Exemption of survivor benefits qualifying as life .
insurance proc eeds

, Some, retirement plans' provide benefits under life insurance contracts
to survivors of employees who die prior to r e t i r e m e n t 2/ Such payments are
exempt as life insurance proceeds payable by reason of the death of the in­
sured* This tends, to discriminate against beneficiaries^ under other types
of plans who receive refunds payable on death of the employee prior to re­
tirement which* although similar in substano-e* do -not qualify as life in­
surance proceeds and are thus taxable© ~bj
D ft

Comparative treatment of employer and employee eontr^utions^
under retirement plans

While employee contributions to retirement funds are not currently
deductible or excludable from wages, employer contributions under quali­
fied plans are not currently taxed to the employee.» z/ This treatment
tends to. confer substantial tax advantages on the provision of retirement
benefits through employer.contributions.as compared vdth employee contri­
butions© In addition to the advantage of tax deferment.* such benefits
would generally be subject either to lower rates ,of, tax or exempt, since
they--would be included in the. employee!s income, after, retirement, which
-ordinarily, is substantially lower- than during his employment*. The tax
advantage would vary in value depending on whether the trend of tax,
burdens is downward tor upward© Moreover, comparatively, high employer
contributions also; tend to be preferable because under the 3-percent
rule there would be less chance of wastage of tax-free recovery of
capital© Consequently, there.would seem to. be a better chance of paying
a smaller aggregate income tax during the working and retirement periods
of -the employee if he is under a pension;plan which includes a relatively
high proportion of employer contributions© That .is., the. employee w ose

/

1/

y

See■Sec b o l^U and 23(p)» - • "
1 .,
V-,
».
However, the premium value, of the term insurance portion of the contract
attributable to the employer contribution is currently includible in the
employee*s taxable income as wages©
See RegulationsHI* Seca 29©loi>“ «*
Either as ordinary income or as long-term capital gains, as previously
noted.© .
....
- ..
......
...
Under non-qualified, plans, retirement benefits contributed by the em­
ployer which give the employee a nonforfeitable beneficial interest
are currentXv included in the employee^ wages©
r - .

- 25 employer pays a lower nominal wage and supplements it with retirement "bene­
fits appears to have a tax advantage over another employee in the same sub­
stantive position who receives a higher money wage subject to larger de­
ductions for retirement»
It appears that the existing provisions have tended to encourage noncontributory as against contributory plans and, under contributory plans, a
higher ratio of employer to enrployee contributions* It is estimated that
roughly two-thirds of tho qualified industrial retirement pension' plans
are noncontributory, that is, financed solely by the employer, and that
one-third of the plans are contributory, involving joint sharing of cost
by employer and employee*
During the war there was a noticeable shift towards noncontributory
plans owing .to thè stimulus of wage and salary stabili zation and high
wartime tax rates® Since the war there has been a reverse tendency*
E*

Exemption of installment payment of life insurance
proceeds by reason of death of the insured

Under present law and regulations, life insurance proceeds 'payable
by reason of death of the insured., are entirely exempt whether paid in a
lump sum or in installments, including the element of interest >earned
after the death of the insured.
Section 2 2 (b)(1 ) excludes from gross income "amounts"received under
a life insurance contract paid by reason of the death of the insured,
whether in a single sum or otherwise (but if such ^mounts are held by the
insurer under e.n agreement to pay interest thereon, the interest payments
shall be included in gross income)#n former regulations sought to imple­
ment this provision by treating installment payments chosen as an option
in lieu.of a specified lump sum as consisting partly of capital and partly
of interest accruing after death of the insured# 1/ However, in view of
court decisions which failed to sustain these regulations, 2J they were
amended to exempt such life insurance proceeds in their^entirety, includ­
ing the interest element, earned after the death of the insured, where
they represent amounts stated on the face of the policy«» ¿/
The exemption .of.such installment payments in their entirety makes
possible the exclusion from taxable income of a larger aggregate amount
than tho lump sum, payable at the time of death of the insured^ This
exemption of the interest income encourages the choice of installment
l/

2J

These provisions did not apply the 3~ P ercent rule to such payments W t
provided for the exclusion of a portion of each payment equal to the
lump-sum payable at the time of the death of the insured., divided by
the number of years the payments were expected to run® Prior regu­
lations taxing such amounts, whether either the insured, or the bene­
ficiary exercised, the installment option,were later modified, to apply
only when the beneficiary exercised the option 0
Pierce, Katharine C 0 2 T»Ce 2>32, a&d
Fed.® (2d) 3&2>o
T»D® 55i5$ approved. May 1 6 , 19^6, C#3a 19^6~1 j> P® 26 ®

payments of insurance proceeds and discriminates against the widow or
other heir whose share in an estate is invested directly in Government
"bonds or a farm or "business as compared with one whose capital is held
for investment in the form of life insurance reserves.
UL~

r~~

avoidance,
under
deferred
annuity
contracts•
-rm I r- .1- '• /. i
~~’i ------—
w - » - — » «■' '■ 1

Interest earned on funds invested in deferred annuities is^not
included currently in taxable income. However, it is included in
income &$'■ it is received in the form of.a cash annuity payment and
segregated from the return of consideration under the 3vP®^cent annuity
rule. In addition to the usual advantage of postponing tax, this treat­
ment may defer the receipt oftincome from annuity investments to a périod
when, generaJLly speaking, the individual!s income is lower and, tnerefore
subject to lower rates of tax*
The privilege of tax postponement on interest earned under deferred
annuity contracts is not unique© It is also enjoyed, by investors in
life insurance and, as already noted, where proceeds are paid by reason
of death of the insured, complete exemption is granted* Similarly, i n ­
dividuals owning assets which include unrealised"capital#gains may
either postpone income tax liability on such gains or avoid income tax
entirely by transferring such assets by gift or at death. Taxpayers
on a cash basis may defer inclusion of interest on accrual bonds, such
as Series % and F. United States savings bonds until redemption or
maturityo
To some extent the current exclusion of inter èst on d.eferred
annuity contracts-may<be justified as an encouragement to systematic
and. institutionally protected savings for old age© Moreover, many
annuity contracts are tied to life insurance policies where the
exemption or postponement of the inclusion of interest on reserves
is. a traditional feature of the income tax.
It would bo difficult t
from the standpoint of compliance and administration to require the
computation and. current reporting of small amounts of such interest*
While the deferred recognition for tax purposes of investment
income arising under both annuity and. insurance arrangements raises
basic questions of income tax policy, the ma.jor problem of tax avoid­
ance referred to hère is the possible purchase ty investors on a sub­
stantial scale of deferred annuity contracts with -a view to avoiding
tax* To some extent there is an automatic check on annuity investments
for tax- avoidance since the hazard of loss of income or capital in the
event of premature death which is characteristic of* annuity#investment
and the low rate of return after loading charges would discourage many
individuals from investing substantial amounts in this form. ITcverthe-*
less, the temporary postponement of tax and 'possible ultimate exemption,
from tax of such interest involve^discriminât ion against taxpayers whose
savings are invested through channels where interest is currently taxed©
It also results in lower revenues 0

- ¿7 -

Gr. Areas of uncertainty in the treatment of annuities
1«

D efinition of annuities and treatment of refund annuities

Some doubt apparently exists as to the definition of an annuity
for the purpose of applying the 3~percent rule* Under existing regu­
lations, the 3 -parcent rule' is applicable to payments under an annuity
or endowment contract \tfhether for a fixed period, such a's a term of
years, or for an indefinite period, as for life. 1/ However, it has
been held that (a) an annuity contemplates using up of principal in
making periodic payments, the annuitant having a right only to the
payments and not the principal fund from which they are derived, and
(b) a true annuity is for an indefinite period, such as for life or
for a guaranteed fixed period and remaining life thereafter* Thus,
installment payments under an endowment contract, equivalent to an
annuity certain not involving a life contingency,have been entirely
exempted until cost was recovered. 2 /
There also appears to be uncertainty about the application of
the general rule that payments to a survivor annuitant are includible
in taxable income to the same extent as though the original annuitant
had lived and received such payments. ¿/ Under true joint and survivor
annuity contracts, the 3 -Percent rule applies to the survivor as well
as to the original annuitant, the consideration being the same for pur­
poses of. either recipient. 4/ However, under some refund annuity con­
tracts the application of the 3 -perc^nt rule is interrupted by the
death of the original annuitant.

¥

U

1/

1/

Regulations 111, S ec. 29.22(b)(2)-2.
Thornley, George E . 2 T.C. 220. non-acquiesced. Commissioners
appeal dismissed (nolle prosse) March S’, 1955,
In the case of employees'* annuities the law and regulations provide
specifically that the annuity paid to the employee’s widow or other
beneficiary under the contract shall be included in the beneficiary’s
gross income to the same extent it would be included in the employee’s
gross income if employee had lived and received the payments. See
Sec. 1 6 5 (b) and ^Regulations 1 1 1 , Secs. 29«22(bK2)— 5, 29*lo5~6, and
Sec* 126(a)-*
See, for example, iHacArthur v. Commissioner, S T.C. Ho. 3 2 ,February 10»
1951*
------—
------- T—
Where the refund annuitant acquires by gift from the purchaser of a
single-premium refund annuity contract an indefeasible, right to the
annuity payments and the refund payments at the time of the purchase
of the contract by reason of the purchaser having relinquished all
rights to change the beneficiary and demand the cash surrender value
of the contract, the refund payments are exempt until the payments
made in the future,, when added to the payments previously received
tax-free, equal the consideration paid for the contract. Where the
rights under such a contract are acquired by the refund annuitant
only upon the death of another, the contract being revocable by the
purchaser prior to such death, the basis is the commuted value of
the future refund payments as of the date of death and the payments
are divided each year into taxable and nontaxable portions. See ’
I.T. 3322, C.B. 1939-2, p. 177» superseding and modifying I.T. 3150,
C.B. 1937-2, p. 62.
f•

1L «
1L v
Qj
J

« 2S ->

2,

Annuities arising,out of property transactions

Certain questions have arisen with regard to the income tax treat«*
merit of transactions involving the exchange of property for an agreement
to pay a number of cash installments in the nature of an annuity, where
the party paying the annuity is n o t ’ah insurance company- For example,
a :father sells property to his son receiving in exchange an annuity of
#15,000 a year for life. If valued on the basis of standard lifeexpectancy tables, the annuity would be worth #150,000# If this were
equal to the fair market value of the property, no gift tax would-be
paid* However, the transaction might actually have been a transfer
for inadequate consideration, if the father's health were -known to
have been poor and he died shortly thereafter, leaving the son in
possession of the property#
The questions which do not appear to be definitely settled are; l/
(a) Is the acquisition of such an annuity a closed transaction so that
gain or loss may be recognized at once?
(b) Are the installment payments
to be treated as an annuity, the consideration for which is the cost or
value of the property exchanged depending on whether gain or loss was
recognized?
(c) Should the annuity be valued on the basis of a-standard
mortality table and standard insurance company premiums or should the
particular facts of the case be taken into consideration?
(d) In the
case of intra-family transactions, what is the method of measuring and
treating excessive consideration under the Federal ©state and gift .tax?
IV«

Alternative solutions

There are presented below some of the possible alternative solutions
to the problems and is sues raised by the present income tax treatment
of pensions and annuities discussed in the preceding section#
A*

Change i n :the 3-percent annuity-rule

Correction of the .inadequacies of the existing 3-pcrcent rule may
be approached in three alternative ways*
(1 ) separation of the income
and capital elements to include'the average income portion of annuity payments, (2) modification of the 3-percent rule to reduce or eliminate
the percentage of the consideration paid required to be included in
taxable income, and '(3)-inclusion in taxable income of an amount equal
to the interest earned on the reserve remaining in the annuity...

2/

For tentative but conflicting answers,-see Steenburg, ETA memo,
December 1941, P*H# par# 64,392, and Randolph Paul, Studies on
Federal Taxation , Third Series, pp* 393-*399#

- 29

1 * Inclusion of the average income portion of each
annuity payment.
One alternative to the 3 -percent rule is to include in taxable
income a portion of each annuity payment equal to the average annual
income element under su.cjh a contract as determined on an average lifeexpectancy basis » In general, there would be included in taxable income
a percentage of each annuity payment equal to the ratio which the excess
of total expected receipts over the amount paid for the annuity bears
to total expected receipts.
In the simplest situation, such as a'lifetime annuity without
refund or an annuity certain, \f this method would amount to excluding
from gross income a portion of each annuity payment equal to the
paid in consideration divided by the number of years payments were
expected to continúen In the case of a lifetime annuity, the expected
period of payments would be the annuitant’s life expectancy when the
annuity payments became effective« Appropriate life-expectancy tables
could be specified by either le gislatí on or regulation.« The selection
of the appropriate life-expectancy table or tables would be important
from both the equity and revenue standpoints* A table indicating a
lower expectation of life would result in a larger exclusion, favoring
a taxpayer, while one indicating a higher expectancy would result in
a smaller exclusion, favoring the Government. Use of the tables relied
on by the payer in pricing the annuity might be undesirable since it
would result in lack of uniformity and could open the door to tax
avoidance. However, it might be desirable to apply different expectancy
tables to different annuitant groups, in accordance with obvious group
differences. For example, annuitants who voluntarily purchase annuity
contracts from life insurance companies are a more selected group than
pensioners under regular retirement plans who would tend to have more
nearly the same life expectancies as members of the population at large.
This method would involve little or no compliance problems for the annui­
tant, if the necessary information regarding the taxable portion of the
annuity payment could be furnished by the company or organization paying
the annuity. Thus, beginning with the first payment, the payer would state
to the annuitant the portion of the annuity payments to be included in
taxable income- and the portion to be excluded as tax-free recovery of
consideration paid. This method of taxing annuities is the one
recommended by the Canadian Royal Commission on the Taxation of Annuities
and Family Corporations and enacted under 1945 Canadian revenue legisla­
tion. '¿/ It is also the method followed in principle under former Federal
regulations applicable to annuities under life insurance, policies paid by

Ï7
2/

See Appendix D for a description of forms of annuities
See Appendix B, and Watson, Income Tax on Annuity Payments, op. cit.

- 30 -

reason of the death of the insured* It was used in taxing certain
annuities under the Revenue Act of 1924. and was regarded favorably
by Treasury représentatives -when the .3-per cent rule was being con».
sidered in 1934* ■

.

*

The one-ration of the method described above is briefly
illustrated below* —

■

'

Illustration 1, Determination of,income portion of annuity
m ent undor^verage' "li fe -^peo^âncy method. l i t h e simplest typ.e^of
caseT’a'mSn aged 65 purchases an annuity of $1 ,2 0 0 a year’xor life
without refund at death,, payable $100 monthly, for t/ihich he P^ys
115.900* Total expected receipts under such a contract would be
v. .
$17,280, as computed on the basis- of the 1937 Standard-Annuity; Table*1/
Under the formula each annuity-payment would be includible in .gross
income to the extent'of 8 percent of $1,200 or |96 a year* Zf
This method apnears to offer a fair and rational way of segre­
gating the income and capital elements of an annuity for income-tax
purposes. In effect, it applies for income tax purposes the principle
of averaging life’ expectancies which.underlie? the determination of
benefits in annuity contracts * Thus.,.in, the average case, where the
annuitant lives his life expectancy, it would include in his taxable .
income the exact amount of his aggregate interest on the annuity
investment and,exclude the exact amount of his original investment.
Under this group or average, procedure, annuitants who do not live
their life expectancies would not-.be .allowed an adjustment for
mortality losses. These annuitants would not recover the entire ^
amount of their capital outlay tax-free. .On the other hand, annui­
tants who ouniixTe their life expectancies would not be filly’taxed •
on their gains , since the amount ..includible in taxable ■income would.;...remain the same each year, even after-they had fully recovered -their
capital outlay tax-free*. This approach to the difficuAt question of
how to treat for income tax purposes.gains. derived by long-lived and
losses incurred by short-lived annuitants may be:regarded as according
eauitable tax treatment.to annuitants as a group*

Î7
~

Under the formula Total expected receipts minus consideration- or
~
“Total expected receipts
$17,280 - $15,900 = 8 percent.
p T 72'gO“

'

The figure $17,280 is equal to

.$li200> the annual amount of the annuity, times 14*.4:, the annui­
tant’s.-life .expectancy at the age of 65.
. \« ;
■2/ I d e n t i c a l , results are obtained if -the excludible portion, of each
■ annual, payment is competed as the consideration divided by life
expectancy* On t h i s basis, the portion' excluded each year would
be -vl5,900f14*4- or $1,104, and the amount included would thus be
determined to be $1,200 - $1,104 or $96*

This method would make a portion' of each payment includible in
taxable: income from the start, thereby .avoiding undue tax postponement
which led to the enactment of the 3~percent rule. 1/ It would also^
avoid, an artificial fluctuation- in taxable income such-,as arises apder
the Vuercent rule. Therefore, it would meet the problem of lowrincome
annuitants wasting various portions of their tax-free recovery of con­
sideration under-present law. .at. would avoid the overtaxation of im­
mediate annuities, characteristic of the 3 -porcent rule.. It would more
closely approximate than present law the net income, realized by annui­
tants as a -group," However, in the case of deferred annuities, it would
tend to slow up the rate of tax-free recovery, of capital as compared
with present law, resulting in the inclusion of a larger amount .of.
.annuity receipts as taxable income for •borne short-lived annuitants«;,^
Long-lived annuitants, however, would gain in comparisop with present
il-nw, since they would recover tax-free more than 100 percent of their
capital: outlay.
a.

Joint and survivor annuities

Under the average life-expectancy method, there also arises b h e ^
question of the proper tax treatment of joint and survivorship annuities
of various typos*
(l)

Joint-survivor life-oxp ecta.ncy,method

One way' .to' treat joint and survivor annuities for incomp tax pur­
poses would bo to apply the average life-expoetancy method to the
several lives involved^ This approach would treat a multiple, life .
annuity ?.s an integrated whole for the entire period that payments are
to-be made. Under this method, the same proportionate amount of each
annual payment would be included in taxable income whether received
by the first life or by the survivoro The annual exclusion for return
of consideration would be determined from the beginning on the basis
of thO' number of years payments were expected to continue over the
combined joint and survivor expectation of life.
Illustration 1-a

-

| M M 8 Jjj M

To illustrate, a-mother and laughter, aged
3?» respectively,
purchase an immediate joint and survivor annuity of ■$85 a month or

1] It is recognized that the lifc-cxpectancy method averages the income
element under annuity contracts evenly over time. Thus? the timing
of taxable income under this method tends to favor individual annui­
tants as compared with a method like the reserve-earnings approach,
described below, which would impute a larger portion of the income
to ..earlier years*
See, however, Watson, Income Tax on Annuity Payy
nents, op. cit*, p, 2 9 «

- 32 -

$1 ,0 2 0 a year, the consideration being a singlo premium of $ 3 2 ,0 0 0 «
Their joint and survivorship life expectancy under the 1937 Standard
Annuity Table is about ^5*9 years* The annual exclusion would be
$b97 ($32 ,000 -^ 5 *9 ) and the amount included in gross income each year
payments', were nade to either annultant would be $323 ($1 ,0 2 0 - $ 697 .)*
This method is consistent with the present law approach of tree.td n g a joint-survivor annuity as income in the hands of the survivor
to the same extent n.s if it had been received by the original annuitant.
On a group basis, it would correctly measure the income elements
(interest and previously untaxed compensation) received under jointsurvivor annuity contracts. 1/ It would result in a constant taxable
amount n-ssuning a constant rate of annuity payments* Where the paynents to the survivor are different from the amounts received by the
first annuitant, the includible portion would vary in proportion to
the rate of payment* 2 J
Since this approach is in effect the average life-expectancy
method applied to the several lives, it lias the characteristic .ad­
vantages and disadvantages discussed above with respect to the method
as applied tp one life*
(2)

Conmutcd— value has1s to the survivor 3 /

Another way of applying the life-expectancy method to jointsurvivor annuities is to treat payments to the first life as a single­
life annuity with cost as the consideration* Payments to the survivor
would then bo treated as a, new single— life annuity on the assumption
that the consideration paid for it was equal to its market value or
single premium Value (commuted value) to the survivor on the date of
death of the first annuitant.
illustration l-b
Assume..as in Illustration 1-a, a joint survivor annuity of $1,020
•costing $3 2 ,0 0 0 and payable annually to a woman aged
or to her
daughter aged 32 as survivor* Of the total consideration, about $19,000
may be attributed to the life annuity for the mother, leaving about
$1 3 ,0 0 0 to bo attributed to the cost of the survivorship benofit.

1/ However, the imposition of an estate tax upon the commuted value of
• an annuity payable to a beneficiary of the decedent raises a question
as to the need for an adjustment of the income tax basis of the bene­
ficiary, since such basis may not be the sane as the commuted va.lueB
2/ As noted with respect to one— life annuities^ this method may be re­
garded as giving the taxpayer an advantage in the nature of tax
postponement as compared with a method which would treat earnings
on annuity reserves as realized when accrued*
3/ The commuted value is the market value or single-premium value of
the survivorship annuity as of the date of dearth of the first annuitant.

- 33 Treating payments to the mother.: as a single^life e-nnw'ty costing. •
$19,000,. the excludible:portion of each pnymcht wonl'dyho
on
a life expectancy of about 2 2 .5 years ($1 9 ,0001-22 *5 ). The includible
portion would be $1?6 ($l,020-$g^).' Assuming the first annuitant
lives out her life expectancy, and‘:that the daughter as survivor
begins to receive payments at the ago of 5 5 s the commuted value of
the survivor 1s annuity would be about $ 2 1 ,0 0 0 . JDhc
gv
of each payment to the survivor would-'then be about $8^7 ($2 1 *000^2 ,8 )«
The includible portion would be $173 ($1,020-$8^7). If the^first
annuitant lived only 5 ***** after purchasing the annuity, the c o m u t e d
value of the survivor annuity would be* about $29,500c Under ..hOw
circumstances,, the excludible portion of each survivor annuity ;
would be $736 ($29,500^40.1) and the includible portion would do $28**
($1 ,020 -$73§). Thus, the portion which would be includible as taxaeie
income to the survivor would, under this method, vary depending on
the date of death of the first annuitant«
This method would in effect exempt from income tax accrued
'
interest or untaxed wages which, upon death of the first annuitant,
would be converted into a capital value as part of the cost basis of
the survivor annuitant« This procedure would appear to be consistent
with the exemption of life insurance proceeds payable by reason of
death of tho insured, and with the exemption of .unrealized capital
gains at death. However, it would understate the incohc element of
the. annuity payments received by this group of annuitants.
It would Ido possible,to modify this method to account for the
entire'income received by this group of annuitants. However, this
modification would require that there bo included in tho expected
income taxable to the first life all of the employer contributions
previously not included in the employee’s taxable income and the
interest accruals during tho period of deferment of the survivor
annuity.
It should be noted that this modification would m a k e ^
significant departure from present income tax procedure in that 1
would treat as income constructively received by the first annuitants
income which would actually be received only by the survivor-annuitant.
(3)

Split-cost method

A third approach would also troat the first-life and secondlife annuities as separate entities.. Unlike the commuted-value.
method, it would treat tho survivorship annuity as merely a deferred
annuity. The cost basis for the first life would bo tho portion of
tho total consideration paid for the joint and survivorship annul y,
which could bo attributed to a single-life annuity, the remainder of .
the total cost would be treated as the cost basis for the survivor
benefit feature.

XHustrati on 1- c
Under the split-cost method, the payments under joint-survivor
annuity contract cited in' Illustrations l*~a and 1-b would he taxable
as follows: Each annual payment to the older woman'as first annul
tant would he includible in gross income"* to the extent of $176* Just
as under the method shown iii Illustration 1—b , Assuming her death at
the end of her life expectancy of 22«5 years, payments to the survivor,
then aged 5 5 , would be excluded to the extent of $52^ ($ 1 3 ? 000^ 24*g ) . ^
Thus, the. includible portion to the survivor would bo $^96 ($1 ,020-$524 )*
However, if the original annuitant died after only 5 years, the excludible portion of each survivor payment would be $32^ ($ 1 3 * 0 0 0 ‘fH o « l) •
and the amount included in. gross income would be $696 v$li020 ~$ 32 H-)o
Like the commuted-vaJLue method, the portion which would be includible
in the taxable income of the survivor'annuitant under this method
would also vary, depending on the date of death of the first annuitant«
In general, this method would require the survivor to include a
larger portion of his annual payments into his taxable income than
would be required of the first annuitant. Unlike the commuted—Value
method, the split—cost method would not capitalize the accrued interest
and untnxod wages upon death of the first annuitant, since it would
use the purchaser*s original cost for the survivor benefit feature as
the'consideration to be recovered tax-free. Although this method
would also account on a, group basis for the proper amount of income to
ho included for tax purposes» it would allocate the taxable income in
a manner unfavorable to annuitants with contracts resulting in mortality
losses, since they would be required to include a greater proportion
of the receipts as taxable income than would annuitants under similar
contracts producing mortality gains,

, >}

Summarizing the comparative aspects of the three alternatives*
Method (l) treats the two lives under a joint and survivor' annuity
as a single unit; Methods (2) and (3) as separate units.
Trending
the two lives as a, single unit would seem to bo consistent with the
fact that a close family relationship usually exists between such
annuitants and would permit balancing of mortality gains against losses
within the family unit.
In fact, the purchasers of a joint and
survivor contract probably regard it as a single package. Also, under
joint and survivor annuity contracts, the contingencies of long life
and premature death are so hedged against each other that it seems
appropriate hot to separate them. By spreading the income element
evenly over two lives and avoiding abrupt changes in the taxable portion
of payments at the death of one of the annuitants, it recognizes the
need of participants in joint and survivor annuity contracts for
regularity and certainty in their disposable income after tax«

- 35 -

b,

Refund annuities

Th.e life-expectancy nctliod discussed above raises "bne question
of how to treat refunds under annuity contracts containing refund
provisions«, Refund provisions under annuity contracts are designed
to assure-full return of capital either to the annuitant during his
lifetime, or in part to the annuitant during life and the balance
to his' beneficiary after his death« Annuities containing refund
provisions cost more than identica.1 annuities not containing such
provisions«
Refund annuities are of various types». Under one
of refund,
contract, the survivor beneficiary receives a lump sun equal to tho^
cost of the contract less amounts already paid to the annuitant during
his lifetime. Another type of refund provision is embodied under a
contract which pays am annuity for a specific period of years and
for life thereafter* The same result is obtained under a life
annuity with, a guaranty of payments for a specified tern, Generally
speaking, refund payments contain no element of income; they consist
of repayment of tho unrecovered, investment in the annuity. One
important exception, however, occurs under a deferred or employee
annuity, where the refund or guaranteed payment is based on thesingle—premium value of the contract on the de.te payments begin, a,s
distinguished from the actual, consideration or premiums paid by theannuitant for the contract, which is a lower figure«- In this situa­
tion, refund payments based on the higher figure may include elements
of deferred.wages or interest accrued during the deferred period*

- \c **

I

.

1

•

" - ;3o

n» r-

2c

■■

’One approach to the treatment. of -refund' payments would be' to
exempt such' payments to the extent they consist of refunds of
unrecoverod cost. This could be done by alluring the refund bene­
ficiary .a ‘basis equal to the original "cost -less--amounts already
received by the annuitant,. In the event',of installment- refund
payments, the basis, would be prorated over the period.■installments •
were to be paid.
In some respects the exemption of refund payments night be con­
sidered to. call for a modification of the treatment of the original
annuitant under refund contracts,. The life expectancy-method exempts
part of the gains of long-lived annuitants to counterbalance the non-,
recognition of losses incurred by annuitants who fail to live out their
life expectancy. However, under refund contracts, annuitants are
protected against loss of capital. Hence, the exemption of gains where
no losses can occur would weight the scales against t h e ’Governne'nt’s
revenues.
One solution -would be to reduce the cost basis of refund
annuities for purposes of the capital recovery exclusion by the
additional premium attributable to the refund clause in the contract.
In effect,- -this procedure would treat the annuity cost as consisting
in "part-of a life insurance premium, .and in part of the cost of a life
annuity. This disallowance of the cost of the refund feature for
capital recovery purposes would parallel the exemption of the refund
payable in the. event of death of the annuitant, Tho adjustment of the
cost which' is recognized in allowing capital recovery under refund
contracts might also bo applicable with respect to deferred annuity
contracts with provision for refund during the deferred period (before
commencement of annuity payments).
However, special treatment of refund payments might bo considered
unnecessary or undesirable because of the cumbers oneness of the adjustment
described above or because of possible inconsistency with the treatment
of survivorsf benefits under joint and survivor annuities. For these
or other reasons, it might be desirable to treat refund payments' in a
manner parallel with the provisions adopted for survivor annuities.
Refund payments might be included in taxable income in the same percentage
as if received as annuity payments by the original -annuitant« • If the split-cost method imre adopted for joint, and survivor annuities, it
could also be applied to refunds: the refund would be taxable to the.
extent it'"exceeded the portion of the cost of the whole contract
attributable to tho refund feature« This method would ordinarily ■
result in treating a substantial part of refunds as taxable income«
Similarly, the comnuted-value-basis method, ■.if adopted' for joint and
survivor-.annuities, might also- be applied ':t'a-‘
.refundupayments© Tho
latter method would exempt refund payments, except whore paid in
installments over a considerable period of time.

- 37 -

In many respects, the methods for treating refunds described here
would involve the same considerations as the application of the same
method to joint-survivor payments, excepting that-survivor annuities
may include income in view of the remaining life contingency; while
refund payments arc .not true annuities since they may. bo measured with
certainty when the life contingency element is terminated by the death
of the annuitant a Consequently, it m a y b e considered desirable to
entirely exempt refunds to the extent that they constitute return of
principal«
2»

Modification of the 3-pcrccnt rule
a.

More adequate provision for capital recovery

As an alternative to the life-expectancy method discussed above,
it would be possible to modify the existing 3-percent rule to provide, a
more adequate method for the tax-free recovery of capital« Such a
modification would contain the following features:
(1). The amount
required to be included in taxable income 'would be reduced from 3 per­
cent to some lower percentage, say 1 or lj percent of the consideration
paid for, the annuity» 1/ This feature would be designed to avoid the
overstatement of income, as in the case of immediate annuities, so that
the average annuitant could exclude the full amount of his capital outlay
tax-free«
(2) A second feature would be to give the taxpayer the option
of including a larger amount« 2/ This feature would permit annuitants
to vary the amount of the annual payments to be included in taxable income
so that they could avoid wasting amounts of tax-free exclusions which
would not yield a tax benefit« As under present law, amounts excluded
from taxable-income would be,cumulated until the consideration was w
recovered tax-free,'after which the entire annual payment would be
included in taxable income« This method is illustrated below©
Illustration 2.

,Treatment of annuities under modification of the
3-percent rule

Assume an annuitant
has paid *10,.000, a life
than the annuity« If he
include and .exclude from

1/

2/

with a lifetime annuity of vi,000 for 'which he
expectancy of 12 years and no income other
could choose the portion of the payments to
taxable income, he 'would choose to include

The percentage inclusion requirement might even be eliminated.
This
would amount to going back to the pro-1934 method under which annuity
proceeds were excluded in their entirety until their total was equal
to,thc consideration paid»
If the option were available each year, the taxpayer could minimize
his tax liability by changing the includible amount from year to year
in accordance w i t h .his exemption status, allowable deductions and
income from all sources«

$5^9 l/ in taxable income each year and exclude £1+51V thereby remaining
nontaxable in each year* On this basis he could remain.nontaxable for
as long as 22 years* After 22 years the total amount excluded would be
£ 9 ,9 2 2 leaving £78 of cost yet to be recovered tax-free* The 23 rd year
he would include £922 and exclude £ 7 $* becoming taxable for the first
time*
In subseauent years the entire £l,000 would be includible in
gross income*
Assuming thé same annuitant to have £550 2/ of other income, he
would choose to include the minimum stipulated percentage of consideration,
say lj percent, or £150 in taxable income, excluding £$50 annually for
11 years; in#the 12th year ho would include $350 and exclude $650 ;
thereafter, the entire £l,000 would be included in taxable income for
tax purposes*
The tax treatment of an illustrative employee annuity^(l) under
present law, (2 ) under the indicated modification of the 3~Per9ent rule,
and (3 ) under the life-expectancy method is compared below*
Illustrâtion 3 »

Comparisen of present, law, modification of
3—percent rule and life— expectancy methods
applicable to employee annuity

This table is based on the following assumptions; amount of
employee annuity £ 9 0 0 ; no other income; employee^ consideration £l,800;
life expectancy 2^ ye^rs; personal exemption and deductions of up to
£559 of adjusted gross income under the present l aw Supplement T tax table*

Year

1

£

2

5U £
5U

3

792

%

900
900
900
900

5
6
7
S~2U
Total
over
2^ years

..

900

1 9 ,8 0 0

.

1

Modification of the
3—n c-rcent rule
♦'■
Amount 9*
4
included : Amount :
:excluded:, ^ax
in
•
4.
4
: taxable f
:
income :

^rpsRnt, law
!
:
; Amount ;
:A nel tided: *'Amount ;
î
in
:exclud ed ; ^ax
: taxable;
i
è
Î income i
8h6
ghg
108 £

0
0

0
0
0

0 £

0

5H9 £
5 I19

61
61

1 *800 1 ,1 5 0

19,800

61
61
61
61

5U 9

351
351

855

%

1,800 1 »321

900

900

19,800

0
0

.

£

f

included :, Amo unt :
:.
In
:excluded; Tax
r
•.
»
! taxable •
: income 4.
.
t

825
825
825
825
825
S 25
825
825

$Ù9

llS

i Amount *

0 £
0
0
0
0

351
351
351

Uo
61

5

'Life-exp ectancy method
«
9

52

.,
>
•

■ 75

è

$

75
75
75
75
75
75
75

1+8
1+8
1+8
1+8

1*800

1 »152

‘

hg

The maximum amount of exempt income under the Supplement T tax tab! e.
r The
maximum t axabl e income under the Supplement T tax ta1viG*

1/

U8
U8
U8

- 39 b*

Deduction f or Tosses incurred
annuitants (mortality losses)

hy short-lived

•■
A criticism <t£ b'oth 'the'3-percent '.rule and--thepi*e-19 34 treatment
is that these methods fail •to provide'tax adjustment s'afor the Tosses- of
'annuitants who- die before" receiving ■their entire consideration tax-free*
Those making this •criticism maintain that1 from the viewpoint of the
annuitant, an annuity contract involves an element of chance associated
with the relationship of the annuitants actual life experience to his
life expectancy; the annuitant whose life span falls short of his life
expectancy suffers a loss, the'“chàndes of which are offset b y the
possibility of his life span exceeding his life expectancy.
On the
basis of this premise, they contend that mortality,gaj^ns and losses
‘should receive parallel t a x ’treatment; t h a t ;to the ;extent that no
adjustments are made'for the Tosses of short-lived annuitants, no taxes
should,bo assessed, against the gains of- long-lived‘'annuitants. .The life‘expectancy method'attempts’to meet this criticism oh, a group basis by .
not taxing mortality gains in full 'as an offset to the nonrecognition of
mortality Tosses.
’’
•
:
1
Proposals for a tax adjustment for losses of short-lived annuitants
raise a number' of’considerations. If ope’regards an annuity contract as
representing insurance against a certain type of contingency, namely,
living so long that the individual’s means become inadequate, for. his
support, it may be considered that the annuitant'receives security in
return for his annuity outlay and that no real financial loss is involved
in the event of premature death. 1/
• A .tax.' ad justment in -the form' of a' loss deduction for. annuitants *
tmortality-losses"in the year of the annuitant’s death would'in many
instances be inëffective "because the income for that year would be
inadequate to.absorb the entire loss. Therefore, to be fully effective
the tax’:adjustment would need to provide for carryback.'of losses to
preceding years ..and appropriate refunds* Such procedure would involve
serious administrative difficulties.
The question is also raised as
to how the loss should be determined.
One approach would-be to .define
the loss as the--amount of the consideration paid for the annuity which
»has .not yet been excluded for indomo tax purposes# This approach
introduces a complete symmetry in the tax treatment"of gains.and losses
where -the gains" are fully taxable. Another approach would be to define
the loss deduction as the amount of consideration not yet excluded taxfree, but not in excess of the amount of annuity income included for
:tax purposes, This approach would/tedd’to Timit the. -tax benefit from
such deduction to the amount of tax liability attributable to the ;
inclusion :o.f- a- portion oî the annuity in" taxable 'Income. 1
..:

1/ This reasoning underlies the present riiLing that mortality losses
.

under annuity' contracts are not deductible# Sec I.T. 291.5, op.c cit*;
"Walter D» Freyburger, "Income Tax on Annuity payments,".Taxes, Vol.24,
No. 9 - (Sept. 194-6), p. 862; Robert Moischholder,'"Taxation of Annuity
-Contracts Under Federal Income -Tax," Michigan Law-Review, Vol. 40
(¿ay 19424,- p* 1017.

Finally, tax adjustments for losses, suffered by short-lived
annuitants would 'be of no direct benefit, to the annuitant during his
lifetime* ‘Instead, the benefit would accrue to his estate» This
would be an important consideration to many annuitants, who wore
concerned with-.the financial security of survivors. For others,
however, this type of adjustment would be less satisfactory than
some other method which would be of actual, benefit to the annuitant
during his lifetime*
Maximum protection against.taxing return of -capital during the
lifetime of the annuitant would be provided under the pro-1934 method,
modified to ensure tax benefit for exclusions* However, this has the
defect of abruptly increasing the taxable portion1of an annuity and
in some instances of reducing appreciably (by the amount of the tax)
the amount- of income available for meeting living expenses after capital
is recovered. 1/ Many annuitants might feel they should anticipate
this development by putting aside a portion of their annuity during
earlier years. To this extent, the pro-1934 method of exempting all
annuity payments until consideration was recovered would not afford
real.relief even to the short-lived annuitant*
■ 3.

Reserve-earnings approach

A third general method of determining the taxable element in
annuity income would be to impute to the annuitant each year an amount
of income equal to the interest earned on the calculated reserve behind
his annuity» In general, such reserve, calculated in accordance with
established actuarial standards, corresponds at any given time to each
annuitant’s pro rata share of the aggregate capital remaining as a
reserve behind a group of annuity contracts.
This method would amount
to treating annuity payments somewhat like a series of withdrawals
from a bank account, consisting partly of principal and partly of
inter.st on the declining;balance* It would involve the inclusion of
a high portion•of the payments and a low rate of exclusion for capital
recovery curing the early years of the annuity, wltn a gradual decrease
of. the port-ion included in income as the annuitant grew older.
This
method is regarded by some observers as the fairest way of determining
for tax purposes the income element under annuity investmentsr 2/

1/

2/

It should be noted, however, that a modification allowing annuitants
to slow up the rate of annual exclusion to ensure tax benefit would,
in many instances whore the taxpayer’s income is low, .postpone the
time when 'the annuity became taxable beyond normal life expectancy»
See Illustration 2, above*
John S. Thompson, "Income Tax on Annuities,".Transactions„ Actuarial
Society of America, May 1915* Vol* X$£, Part I, No* 53, pp* 95-108.
Also william Vickrey, Agenda for Progressive Taxation, Ronald Press,
New York, 194-7, pp* 77-78*

hi
The reserve-earnings method would provide a correct over-all
measurement of the income element under annuities« If this method
were followed literally, gains of long-lived annuitants would tend to
be excluded from taxable income, since the reserve on which the income
clement is computed would.be smaller the longer the annuitant lived*
„hero the annuitant lived substantially beyond his normal expectancy,
a very low portion of income would be included. 1/ However, it would be
possible to modify this by requiring the full inclusion of payments in
taxable income after consideration was recovered» This modification is:
subject to the criticism that it would result in an abrupt increases in
the taxable portion of annuity income as under the 3-pcrcent rule» In
the absence of a provision for a tax adjustment to short-lived annuitants,
those who died prematurely would be treated less favorably under^the
reserve-warnings method than’under the life—expectancy method, since
the former would result in a higher taxable amount during the early years
payments viere received* This treatment may be viewed as avoiding post­
ponement of income realization for tax purposes which may be said to occur
under the life-expectancy method«
Compliance and administration problems under the reserve-earnings
method would appear to be Serious but not insurmountable* The task of
actuarial analysis for purposes of measuring income arid return of principal
would be substantially more difficult under the reserve-earnings method
than under the life-expectancy method, especially in the case «of more
complicated typos 0f contracts. Moreover, in the case of deferred
annuities and employee annuities, the problem of determining an equitable
and practicable method of treating deferred wages and accrued interest
would be particularly difficult.
The rationale of this method would
not be readily comprehensible to most taxpayers* • Since the taxable
income portion of a given annuity would vary from year to year under
the reserve-earnings method, it would be necessary to provide adequate
information to the taxpayer with respect to the amount of annuity income
he should report for tax purposes each successive year * Xhis might be
done either by an annual information return which the payer of the annuity
would send the annuitant, or by providing the taxpayer with a schedule
of amounts to be reported year by year, analogous, for example, to the
schedule of interest accruals, under a Series E United States savings.^
bond or a schedule of redemption values shown in a life insurance policy,
contract..
4,

Transition problems

If the present treatment of annuities were changed, questions
would arise with regard to the transitional treatment oi annuities
which have been subject to the 3-'Perccnt rule*
Possible alternative,
transition methods for various types of annuities are briefly described ^
below:

*

.
•
a , ' Limit the new method to annuities becoming
effective in the future

«.

m

This approach would afford, no relief to existing annuitants for
inadequate treatment received under the 3 —percent rule« However, it

1/

Thompson, ’’Income Tax on Annuities," op. cit., p, 105*

might be justified under the life—expectancy method in order to avoi
Windfalls in the form of ‘tax-free exclusions. If the 3-parcent rule
were merely modified to 1 or if percent, it would not be necessary to
restrict its application to future annuities since such a change could
be applied to existing annuities without a windfall problem.
b.

Treat existing annuities as though they had been
subject to the now method from the b eginning

• This approach would provide to all annuitants the- benefits of* the new
method with respect to current payments. It would tend to give wind!all
exclusions to some annuitants who had already recovered all or a substantial
part of their principal tax-free, since the aggregate amount of their taxfree recovery would exceed the consideration paid. However, other annuitants
such as those with immediate annuities, would not get a retroactive adjust
nent for past inadequate tax-free exclusions of capital.
c.

Allow annuitants to use the new motnod provided,_thcy
recompute their tax on the now ba s is xor prqvi^Uw-...yoars_

Such a transition provision would afford both current and retroactive
relief for defects of the 3-percent rule under any of the alternative
methods for treating annuities. Although it would avoid windialls, i
would entail serious compliance and administrative- burderfs in connection
with the reopening of previous years* returns« It would be difficult to
apply to years when no return was filed and, in addition, tax refunds
would be involved«
d«

Apply the new method to existing annuities,using the
amount of consideration not already excluded from grogs,
income is the cost basis-for the future

Under both the life-expectancy and the modification of the 3-percentrulc methods, this type of transition would accord considerable .relief to
annuitants who found the present exclusion rat-~ either ina cqua e or ^x
cosslvo. However, it would not accord retroactive relief to taxpayers
who had failed to obtain tax benefit for previous^exclusions.^ It would
avoid windfall exclusions in excess of consideration paid during the
/period of life expectancy«
B.

^... _

_ ;r.

’t
___

,

. ...

... ..

Treatment of social security old-age and survivors* insurance,
and railroad retirement benefits

The Treasury Department has recommended that social security old-age
and survivors’ insurance and railroad retirement benefits be included in
income stlbjpet to t h e .generally applicable revenue laws. 1/ This change

y

See letter from the Secretary of the Treasury to the Chairman of the
Ways and Means Committee, September 21, 1945, published in tne
Congressional Record, September 25, 1945, P* 9137. See also no
statement by Tax Legislative Counsel, U. S. Treasury Department, m
Tax Exemption of Annuity payments under Civil Service.,Retirernent ,
Hearings before the Committee on Finance, U. S. Senate,79th Cong.,
2nd Sess., on H.H© 2943, p. 23*

->3 is recommended both to provide equal treatment for similarly* situated
annuitants and. to avoid the extension of special exemptions to other
pension and annuity groups.
In the event that social security and railroad retirement pension
exemptions were removed, the question would oe raised .as to the proper
determination of the income portion of the pension payments, nominally
a.tax, the employee1s payroll tame contribution is essentially similar in
character to employee contributions under private industrial pension
plans, l/ It would, therefore, appear discriminatory to include the
entire benefit in income when received without allowing the recipient
an equivalent to the exemption of return of contributions which he
would, enjoy under other retirement pension plans. 2/ Possible methods
of treating social security and railroad retirement employee payroll
tax in the event the pensions were included in gross income are discussed
below., ¿/
Method (l). Compute the employee1s total contributions from the
retirement account records; treat this amount as the purchase price
of his annuity; and apply the regular capital-recovery provisions to
such computed consideration.
Method (2 ) . -Assign a reasonable amount as the employee's total
contributions in some proportion to his annuity without reference to
individual retirement account records, and treat this amount as the
purchase price of his annuity, to which the regular capital-recovery
provisions would be applied.
Method (5 ). Exclude some appropriate percentage of each pension
payment as a rough allowance for the tare— free return of contributions
paid.
Method (d). Exempt the pension in its entirety for .one or more
years as a rough approximation to exempting the return of contributions
paid, after which pension payments would- be fully included in taxable
income.

It m a y b e argued, however,‘that the employee tax is not actually borne
by the employee but shifted to the employer or consumersa •’
Tnis is
uncertain, and-in any event, shifting of the employee's cost may also
occur under contributory private retirement plans. Moreover, lack of
close correspondence between the amounts of individual employees* con­
tributions and benefits may occur under private retirement plans as
well as under social security and railroad retirement. Such con­
siderations would not seen to justify failure to allow for tax-free
recovery of employee.contributions.
2/' She amounts involved are more important under railroad retirement than
zander social security old-age and survivors1 insurance,
Different methods of treatment might be applied with respect to social
security as compared with railroad retirement. Moreover, a re-examinatj.011
of methods of tax treatment might be called for in the event 01 a basic
revision of social security or railroad retirement provisions.

127
- HU -

Method (5)o Allow tho payroll tax contribution as a current de­
duction or exclusion 1/ fron tlie income of the employee and make the
pension fully includible in income when subsequently received.
Met ho d (1 ) would require determining and notifying the taxpayer
of his aggregate contributions according to the retirement account
records. This hay involve compliance or administrative burdens which
could bo avoided under the other methods« Both Methods (l) and (2)
would require the application of the regular annuity provisions.
Methods (3) and (U) would be simple but rough methods of allowing
tax-free return of contributions. Method (4) would be subject to the
criticism that it would result in wastage of the exclusion, like the
present 3~percent annuity rule* in the case of low-income recipients,. •
Method (5) would constitute a sharp break: with existing and pre­
vious law since it would allow the current deduction or exclusion of
a savings item. While such treatment is implicitly allowed in the
case of the current noninclusion of employer payroll tax contributions
under social security and railroad retirement as well as employer
contributions under qualified pension plans, its explicit application
to employee payroll tax contributions would raise basic issues regard­
ing the charcucter of the income tax base and might serve as a precedent
for similar treatment for all employee contributions and other current
savings items.
Since this treatment would require the full amounts
of tho pension payments, including return of savings, to bo reported
as income when received in later years, it would not be equivalent.to
exempting savings. 2/ However, the resulting re-allocation of taxable
income from a. current to a future period would tend to shift earnings
from -peak income years -to low-income years, raising issues connected
with averaging of income for tax purposes. In cbntr&st with the
other methods mentioned, it would involve a net revenue loss. The
following table summarizes estimates indicating that the current ex­
clusion of employee payroll tax contributions to social security
old-age and survivors1 insurance and railroad retirement funds would
involve net revenue'.losses of $111 million and $263 million in 19 U 7
and 1957 »r in excess of the revenue increases due to including benefits
in taxable income0

1 f As an exclusion, it would automatically fall outside the standard
deduction. A§ a deduction, it would come under the standard
- deduction unless specifically made deductible in ¡arriving at"
adjusted gross income.
Op
-.0.
2] The problems and issues pertaining to the tax treatment of various
types of saving will be analyzed in another Treasury study. See
statement of the Scoretary of the Treasury before the Ways and
Means Committee of the House of Representatives, May 19» 19^7»
p. 10.

Estimated revenue effects of including social security x>ld~age and
survivors’ insurance and railroad retirement "benefits in taxable
income and excluding employee payroll tax contributions
from taxable income, calendar years I9 H 7 and 1957

Calendar years

•
*

19^7

;

1957

(Millions)
Increase in revenue from including in
taxable incomes
Social security old-age and survivors* insurance benefits
Railroad retirement benefits
Total increase

Decrease in revenue from excluding
from taxable income employee con­
tributions tot
- Social security old-age and sur­
vivors' insurance
Railroad retirement
Total decrease

Ret decrease

$ 23
10

$ 75
15

33

90

103
Jjl
144

30S

J±5

$111

$2 6 3 '

-,

353

a/ Those estimates assume tax rates and exemptions under the Internal
~ Revenue Code, as amended b y the Revenue Act of 19^5« They were
prepared in early summer of 19^7 on the basis of. the unrovised
national income scries of the Department of Commerce* For the
statistical and conceptual differences«between this scries and
the new series on ’'personal income," sec Rational Income Supplement^
to the Survey of Current Business, July 19 47»

0.

.Treatm ent o f lump-sum r e c e ip t s I®

g a in s treatm ent

Long-term c a p it a l g a in s treatm ent a p p lic a b le to a s in g le annual
se ttlem en t o f an employee1s r ig h t s under a q u a lif ie d pension tr u s t
r a is e s q u estio n s o f t a x avoidance and e q u ity . One approach which i s
concerned w ith p reclu d in g p o s s ib le abuses would be to r e s t r i c t c a p it a l
g ain s treatm ent to cases ( f o r example, se p a ra tio n by death) where
the employee or h is fa m ily had no a lt e r n a t iv e but to r e c e iv e a lumpsum d is tr ib u tio n s That i s , f o r purposes o f plugging p o te n t ia l loop­
h o le s , th e ca se f o r c a p i t a l g ains treatm ent might be re-exam ined
where the employee v o lu n ta r ily q u its employment and v o lu n ta r ily tak es
an option to r e c e iv e a lump-sum se ttlem en t o f h is pension fund rig h ts «
Another su gg estio n which m erits fu r th e r study i s th e p o s s i b i l i t y
of s u b s titu tin g some form o f averaging fo r the c a p i t a l g a in s treatm ent
now a p p lic a b le to such pension t r u s t d is tr ib u tio n s c Under Canadian
law, fo r example, lump-sum re tire m e n t se ttle m e n ts p aid a f t e r June 23,
194-0 may a t th e o p tio n o f th e taxpayer be taxed as a separa-te item
of income in th e year re c e iv e d , s u b je c t to th e average r a te o f ta x
a p p lica b le to h is income o f the previou s year« 1f
Whatever th e in h eren t m erits o f c a p ita l g a in s treatm en t where
now a p p lic a b le to re tire m e n t b e n e f its , i t s lim ita t io n to d is tr ib u tio n s
under tru s te e d p lan s r a is e s questions o f e q u ity w ith r e s p e c t to the
treatm ent of r e c ip ie n t s o f Im p-sum payments under n o n -tru ste e d p lan s
who appear to have equal claim f o r r e l i e f from the a p p lic a tio n o f
p ro g ressiv e .rates* Moreover, th e p re sen t income ta x treatm en t o f
survivor refunds may be h eld to d is c rim in a te a g a in s t th ose which do
not c l a s s i f y as l i f e insu rance proceeds in comparison w ith s u b s ta n tiv e ly
s im ila r payments to su rv iv o rs which q u a lify as tax-exem pt l i f e in su r­
ance proceeds p aid by reason o f death o f th e in su red ,
2#

Treatment o f purchase o f single-prem ium annu ity o u tsid e
q u a lif ie d p la n

As noted above, proposals which \tfould allow employee annuities
purchased outside a qualified plan to be taxed only as received,
while allowing the purchase price as a deduction to the employer would
virtually remove the present law sanctions against unqualified plans*
Consequently, it is difficult to find an alternative solution which
would avoid hardship in bona fi'ie casos without creating serious
avoidance opportunities*
Ohe possible alternative would bo the application of socio p.vorag—
m g device (such as the Canadian averaging provision previously noted
or the Section 107 provision) to the value of annuity contracts vested
in the employee* Another approach would be to allow the employee to
- ^ j-^dp tho annuity poymonts in his taxable income as received, but require
lí/ See Appehdix BÓ

*

*

the spreading of the deduction of the cost of such annuity contracts to
the employer over the years the annuity is paid and taxed to the employee.
While this approach would obviate the'thx avoidance problems involved in
allowing employers to tine their deductions for the cost of such contracts
so as to coincide with particular y ears'of high income" or high tax rates,
it would have serious tax avoidance aspects since it would confer sub­
stantial tax savings ih the nature of an effective averaging device of
special importance to highly paid employees.
D.

Installment payment of life insurance proceeds paid-by reason
of'death of the insured •

Under equal tax treatment for income, derived from annuity and insure
ance policies, installment payments of life insurance proceeds would be
treated as an annuity for “which thq consideration'would be deemed to be
the lump sum payable to the beneficiary or the commuted valde of the in­
stallment payment rights at the time of the death of the insured.
2.

Deferred annuity contracts ;

•Savings, invested through annuity contracts sold by life insurance
companies 'or through retirement pension plans receive preferential
treatment compared with savings placed in private interest-bearing
securities and in most Federal securities in that the accrued earnings
are not currently included in taxable income. While the tax savings
involved in most individual cases are small and may be regarded as a
form of subsidy to savings for old.age, the use;of deferred annuity
investments’o h ’a large'scale would go beyond this purpose.
If tax
avoidance through deferred annuities either became, or were regarded
as a serious problem, a possible solution would be to limit the amount
of money Invested by" any individual in deferred annuities on which
interest■accruals could be currently excluded from taxable income.
Interest on amounts' in'- excess of this limit would then be currently
included in taxable"income and tax-free recovery of such interest
would be allowed by adding it to the cost basis of the contract.
F

Comparative treatment of contributory and noncontributory
pensions

The present treatment of employer contributions under retirement
plans involves broad questions of equity in that the current exclusion
from the employee*s taxablë income of the employer contribution, es­
pecially when vested in the employee, is an exception to the general
rule that the Federal income tax applies to all net income actually and
constructively"received. Although the employer contributions are sub-,
sequently included in taxable income of re-tired employees, the present
treatment favors the recipients of employer-financed benefits and tends
to encourage the development of plans on a nqncontributory"basis,_ In
addition, broad economic arid social considerations are also involved
respecting the tax treatment of basic retirement savings.
There are several-alternative methods'of income tax treatment of contributory and noncontributory pensions which would piade them on ■
a comparable basis.
One possibility would be to include 'employer
contributions in the employee*s income for tax purposes. This would

~ b% ~

be unfair where vesting in the employee is inadequate to warrant
current taxation»
Such inequities night he .avoided by making full
vesting of benefits a requirement for qualified plans»
This approach
would increase individual income tax liabilities for employees under
qualified retirement plans» and would remove a substantial part of'
the present favorable treatment accorded such plans»
It has also been proposed that employee contributions to pension
plans be deducted currently and that the benefits be fully included in
gross income when received, 1/ Current deduction of employee contribu­
tions would involve substantial revenue losses. Moreover, the current
deduction of employee retirement contributions would tend to call for
similar tax treatment of other savings items which would involve a
basic change in the annual taxable income concept, to net income less
some portion of savings, 2j This treatment would avoid the problems
dealt with of various provisions of present law relating to the
t a x a b i l i t y by employer contributions to the employee.
It would also
avoid the problem of allowing tax-free return of capital for a broad
class of annuities. Moreover, it would provide a grea.ter degree of
tax encouragement for systematic provision for old-age retirement.
To the extent that currently deductible savings were subsequently tax­
able in full, such treatment would not decrease the total income
taxable to tho employee during his lifetime; rather it would reallocate
his income a m o n g . taxable years. Consequently, it would raise questions
relating to the averaging of income for tax purposes.
Since such
limited application of averaging would be of benefit only to employees,
it would constitute speciaJ treatment of a certain cla.ss of earned
income,
G®

Other considerations

In a comprehensive revision of the annuity provisions, one objective
would be to minimize the area of uncertainty in the definition and
treatment of annuities,

1/ See Report Proposing Amendments to Fedora,,! Income, Estate, and Gift
Tax Laws» Committee on Taxation, Trust Division, American Bankers
Association, January 19^6, pp, 6**7 and 23~2U,
It nay be noted that
under recently adopted Canadian policy, employee contributions to
pension plans up to $900 a year are currently excluded from indi­
vidual income tax, tho payments being taxable when received.
See
Appendix B®
2/ V m ‘ious proposals have also been made to allow self-employed persons
(or employees not covered under organized retirement plans) to
deduct specified amounts of their current earnings if set aside as
a personal retirement fund, possibly through investment in a special
issue of Government bonds® Such investments, including accumulated
interest, would then be included in gross income when converted
into cash, presumably after retirement®
See, for example, Harry
Silverson, MA Hew Tax Proposal,11 Anorican Mercury, March 19^+7*
pp® 3^5“*3^9® It has already been noted that the problems and issues
pertaining to the deduction of various types of savings will be
analyzed in another Treasury study®

129

The treatment of disability retirement pay of regular Army and
Navy personnel as compared with ordinary military retirement pay
should be re-examined* If it is considered desirable to place such
payments on a more comparable basis with ordinary military retirement
pay, one method of achieving this result would be to restrict the .
amounts exempted under Section 2 2 (b)(5 ) to the proportion of disability
retirement payments'which represents the degree of actual disability
for purposes of civilian employment*
Another ôbjective in .resurveying-the disability payment provisions
would be clarification, with a view to removing some of the uncer­
tainties and apparent anomalies encountered under present law with
particular reference to disabled municipal and public employees.
This may be one of the motives behind some recent proposals designed
to broaden the scope of the existing exemption of disability payments.
However, liberalization of the disability provisions in the civilian
area may introduce problems analogous to those found in 'the field of
military disability retirement payments.

/

131

Table 1
Annuities reported on taxable and nontaxable returns with net income, 19*41, by net income classes;
also aggregates for individual returns with no net income
(Net income classes and money figures excepting averages in thousands)
l

Net income classes

Returns with net income:
Form 10*4QA 1/ (est.)
Form 10*40:
Under $5
(est.)
5 " 1 0
10 "
25
25 "
50
50 "
100
100 “
150
I50 "
3OO
300 »
5OO
500 "
1,000
1,000 and over

J

Annuities
:
:Total number •Total income
^Percentage
^Percentage* Average annuity
:of returns :
:Number of *of total
Income per
Amount 8of total 8
:
: returns *returns
8 income
8 return reporting
•
:
:
:
such income
10,252,708

$1 7 ,5 3 1 ,1 0 7

5 and over

1*4,581,121
630,105
23S,880
*48,157
1*4,365
2 ,66*4
1 ,5 3 9
3*48
152
50
9 3 6 ,2 6 0

3 3 ,2 61,799
*4,869,1%
*4,06 8 ,6 1 9
1 ,8 78,735
1,112,017
3 7 0 ,6 1 0
3 5 8 ,9 7 8
15*4,080
120,806
115,153
1 3 ,0 *48,1*41

Total .Form 10*40 A
and Form 10*40 with
net income

2 5 ,770,089

63,8*41,0*47

9 9 ,8 2 8

26*4,032

25,869,917
10,252,708
15,617,209

6*4,105,079

Returns with no net
income, Form 10*40
Grand total
Total,Form lCUOA
Total, Form 10*40

17,531,107
**6,573,972

2/

2/

2/
1*4,263
7 ,3 6 9
1 ,9 7 6
7*41
I7I
I29
31
8
7

2/
2.26$
3 .0 8
*4.10
5 .1 6
6.*42
8.38
8 .9 1
5.26
1*4.00

2*4,695

2 .6*4

2/

2/

2/

2 ,*462

2**47

2 ,1 5 7

.8 2

2/
2/
2/

2/

2/
2/
f

2/

2/

2/
$130,707
1 3 ,3 5 1
9 ,81*4
*4,058
2 ,38*4
573
511
262
6*4
127
31,1*43

2/
.39 1
.2 8
.2*4
.22
.22
.16
.1*4
.1 7
.0 5
.1 1
.2*4

2/

2/
1/

2/
1/
936
1 ,3 3 2
2 ,05*4
3 ,2 1 7
3 ,3 5 1
3.96I
8,*452
8,000
1 8 ,1*3
1,261

$

2/
876
2/
2/
%

Treasury Department, Division of Tax Eesearch
II

Zl

10*40A (optional return), which may be filed by individuals whose gross income is from certain sources only
and is not more than $3»500, does not provide for reporting the amount of net income. Gross income is
tabulated both as total income and as net income.
Not available.

Source:

Based on Statistics of Income for 19*41. Part 1 . Table

" J-ik .

Table 2
Annuities reported on individual returns with net income, 19 hi, by taxable and nontaxable returns, and by net income classes; also
aggregates for taxable and nontaxable individual returns with no net income
(Net income classes and money figures excepting averages in thousands)

'Net income classes

*
*
:
:
:

t
Taxable returns!
With net income!
Form lOhQA 2/(est.)
Form lOhOl
Under $0.75 (est.)
0.75 *
1
»
1.5 "
2
«
2.5 *
3
"
4
»n
5
.*
6
”
7
"
S
"
9
"
10
*
11
»
12
*
13 »
14
*
15 «
20
»
25
"
30
*
ho
»
50 "
60 "
70 »
go
■
90 »
100 *
150 "
200 »
250 "
300 *
hoo "
5OO "
75O «
1,000"
1,500"
2,000»

3,000»
h.ooo"
5,000 and

1
1,5
2
2.5
3
4
5
6

(est.)
(est.)
(est.)
(est.)
(est.)
(est.)
(est.)

7

s
9
10
11
12
13
14
15
20
25
3°
40

50
60
70
80
90
100

150
200
25O
3OO
400
5OO
75O
1,000

1,500

2,000

3,000
4 ,0 0 0

5,000
over

Total, returns with net
income
With no net income,
Form lOhO
Total, taxable
returns
Nontaxable returns!
With net income!
Form lOhOA 2/ (est.)
Form 1040!
Under 0.75
(est.)
0.75 "
1
(est.)
1
"
1.5
(est.)
1.5 "
2
(est.)
(est.)
2
*
2.5
2.5 »
3
(est.)
3
*
k
h
»
5
Total, returns with
net income
With no net income,
Form 10h0
Total, nontaxable returns.
Grand total
Total, Form lOhQA
Total, Form 10h0

Total income
Total
number
of
returns

6,199,51*2 *

Amount

$

10,560,017

35.917
757.627
1,281,521*
2,121,571

22,589

!
! Percentage
idistribution

16.556

1.2
2.8
6.5
9.0
8.0
9.6
4.0
2.1*
1.7

516,921*
452,118
395,365
355,095
,319,353
1,216,075
813,689
580,177
783,570
514,988
362,318
‘
265,086

9
5
•
2

67,389
92,258
61,823
73,189
1*7,617
1*5.395
7,997
23,732
24,223
13,806

.8
.7
.6
.6
.5
1.9
1.3
.9
1.2
.8
.6
.1*
.3
.2
.2
.6
•3
.2
.1
.1
.1
.1
.1
.1
*
♦
*
*

17,502,587

1*9,966,963

77.9

514,273
21*9,078

150,321*
102,4h0
72,278
55.985
1*2,757
3l*,072
27.371*
22,776
19,131*

611,727

61,158

31.609
18,381*
19.785

9,988

5,733
3,51*1
2,307
1,606
1,178
2,661*

198,961
157,189
128,1*62

370,610

922

181*,593

106,996

1*08

209
229
119
104
1*8
3p

k

297

30,031
>*9,996,993

78.0

**,053,166

6,971,090

10.9

858,153
28l*,50l*
1.309,1*91*
1.021*,992
553,386
11*9,629
33,119
1.059

1.999,381
1.999,639
1.332,527
1*31.33^
113J48
h,829

1.1
.5
3.1
3.1
2.1
.7
.2
*

8,267,502

13,87lt,08l*

21.6

23>*,002

99.531
8,367,033

lh.108,086

.1*
22.0

25.869,917

61*.105,079

100.0

10,252,708
15,617,209

17,531.107
1*6,573.973

27.3
72.7

1

$

9.1*75
>*.123
3,055
2,1*71
2,121
1,583
1,282
1,01*5
980
l.OUl
680
2,8U1*
1,91*3
1,186
1,528
l,3l*l*

715

5h9
2,010
1,122
681
797
1+98
258
19?
124
91
69
I7I
75
•33
21
20
11
6
2
5
2
-

1.7
1.2
.7
.9
.8
.3
.5
.2
.2
.2
.3

520

895

1*07
300
262
573
2>(9
92

.2
.1

171

.1
.1
*
*
*
«

21+1
21
19
1*5

62

2l*,695J*/
29

-

-

-

*
-

129,91*9
121
130,071

y

y
y
y
u
y1
y

y
y
y

y
27,157 y
y ,
27,157 y

,

•

79.2

/

y

V
811
905
99**
1,101
1,131
1.091
1,127

1,125
1,1+56

1,240
1.1+15
1,732
1,742
1,917
2,699
2,016
i+,i«97
3,282
3.297
3,797
3.351
3,320
2,788
8,11*3

.3
.1

*

31.901

19.5

2.035
33,936
161*,006

1.2
20.7
100.0

l6>+,006

100.0

y

135
91
253

176

187
222
215

270
225
818
1,052
I76
183
938

1,909
3.167

22,500

2,067

12,1400
-

7,111

32,000
-

-

•
-

1,261
>*,172

y

61

65
77

12,050

1,265

7.0
1.7
7.9
1.9
•6

y

y1
$

6
U
12
9
7
8
10
18
17
20
2U
29
28
30
31
36
46
36
5*7

y
y

79.3

y

y
$

y

.1

11,1*15
2,810
13,023
3,066
9UI
5>*0
100
1*

/

2,1*33
2,1*33

5.2
9.5
12.1
9.1+
8.0
10.2
5.8
2.5
1.9
1.5
1.3
1.0
.8
•6
.6
•6
.i+

Average
annuity
income
per return
for all
returns

y

y

.1*

15,367
13.092
16,757

5,078
3,371*
2,485
*1,926
1,400
1,175
927
871

2h,72i*

y

n
226
8,511
15,630
19,748

Î7

*

:Average an­
n u i t y income
Percentage :per return
distribution ¡reporting
¡such income
! ;
1/

Amount

y

y

1.4
1.1
1.0

17,502,881*

706,1*1*3
315.091

Number
of
returns

y
â
y
y
y
yy

*

757,921+
1.772,579
1*,189,981
5.757,306
5,127.776
6,169,1*81*
2,561,167
*.551,983
1,115,968
880,869
708,595

2.317.362
1.691*,737
1.643,771*

Annuities

y
y

y
y1
y

/

y

y
y
y
y836
y
y *
1,265 y
u

M

y

u
h07

y
y

12

13
10
10
3
2
1*
3
k

y
y
11 y
y
11
8

20
8

Treasury Department, Division of Tax Research
A/
2/
3/
1/

jJ

The number of returns with net income under $9,000 reporting annuities is not available.
Form lOhQA (optional return), which may be filed by individuals whose gross income is from certain sources only and is not more than
$3,000, does not provide, for reporting the amount of net income. Gross income is tabulated both as total income and as net income.
Not available.
Excludes Form lOhQA and Form 10 hO returns with net income under $5,000.
Excludes lOhQA returns.
Less than 0.05 percent.

Source;

Adapted from Statistics of Income for 19hi. .jPart 1 . Table

~\-k.

133
Table 3
Annuities reported on individual retains, form 1040, with net income and with no net income, 1941, by
States and Territories
(Money figures in thousands of dollars)
Total income
(Annuities as pereentage(
Percentage
Annuities
(
(
of total income
( distribution
Returns (Returns:
(Returns(Returns(
(Returns :Returns (
:
with
(with no(
All
( with (with no: All ( with (with no( All (Total ( Annuities
net
( net (returns
( net 1 net (returns* net ( net
sreturns(income1
income (income 1
.(income (Income t______ (income (income l
(
1
Alabama
329.080 $ , 996 $ 330,076 $ 474 I
478
4
$
Alaska
234
37,990
38,224
57
Arizona
U 6 , $35
1,082
560
117.517
577
Arkansas
2 l4 ,l4 0
645
214,785
603
610
O a lifo m la
3.522,077 28,522 3,550,599 22.327
22.578
Colorado
326,962
328,489
1.527
2,819
2.839
Connecticut
968,714
5,938
974,652
3.335
3,359
Delaware
161,119
2,884
164,003
542
569
District of Columbia
858
422,832
421,974
2,787
2,789
Florida
525,882
6.901
532.783
2,520
2,597
Georgia
464,660
2.572
467,232 1,047
1,082
Hawaii
114,332
114,445
113
214
214
Idaho
122.376
560
122,936
200
197
I l l in o i s
3.654,955 16,886 3.671,841 14,903
15.007
Indiana'
1,136,508
3.185 1,139,693
4,282
4,309
Iowa
749.628
1,992
751.620
1,888
1.908
Kansas
2,230
463,734
465,964
1,581
1.599
Kentucky
454.507
456,138
1,631
1,046
1.057
Louisiana
395.628
2.764
398.392
1,238
1,248
Haine
228,187
230,382
638
2,195
660
Maryland
2,281
932,038
929,757
1,798
1.777
Massachusetts
1,936,702 14,847 1.951,549
8.753
8.857
Michigan
2,468,325
5,893 2,474,218 3,825
3.876
Minnesota
884,067
886,682
2,615
2,661
2,686
M ississip p i
186^,872
45?
328
187,331
331
Missouri
1,159.861
5.824 1.165.685
3,669
3 .7 7 7
Montana
800
173,723
4o4
174.523
407
Nebraska
309.41(7
307,631
1.779
710
721
Nevada
57.106
627
56,479
230
266
New Hampshire
940
151.512
152,452
521
531
New Je r s e y
2 .3 6 6 ,0 5 4
9,710 2 .375,764
7,195
7.273
New Mexico
94,448
470
94,918
211
199
New York
7 ,334.537 77.734 7,412,271 27.930
28,353
North C a ro lin a
480,486
810
481,296
94i
North Dakota
144,015
144,3%
334
4%
Ohio
3,o 43.2o 4 12.099 3.055.303 10,311
io,4oi
Oklahoma
430,696 3.040
433.736
1,065
1.033
Oregon
389,566
1.629
1,182
1,211
391.195
P e n n sy lv a n ia
3,7 5 3 ,1 2 0 15.610 3 .768,730 10,551
10,668
Abode Is la n d
340.471
1.526
1.258
3 4 l r997
1.259
South C a ro lin a
208,807
209.620
470
833
605
South D ako ta
472
127.199
127,671
272
280
Tennessee
467,080
468,653
1.573
1,138
1.145
Texas
1.548,490 u.512 1,560,002 2.Ä3
Utah
4
132,103
132,099
260
.2
Vermont
92,866
146
93,012
773
773
V irg in ia
634,864
636.621
1,757
996
1,018
Washington
642,414
2,685
639.729
2,835
2.857
Jest Virginia
1,026
338,372
337.587
785
1 .0 3 1
Wisconsin
994.308
1.186
99 5 ,% 4
4,261
4,265
Vyooiag
86,496
86.853
357
195
197
Wotal individual
returns. P o r n 1040 46,309,940 264,032 46,573,972 161,850 2,157 164,007
.3
.8
•4
100.0
100.0
States and
Territories

t
t
(
>
$

V

l:i

a*III

*

Less than $500.
less than*65 percent.

Source* Adapted from Statistlcg_ of Income for 1941, Part I, Table 6.

\

Table U
Annuities reported on individual returns with net Income, 19b2, by taxable and nontaxable returns,
and by net income classes; also aggregates for Individuals returns with no net income
(Net income classes and money figures in thousands)

;
Net income classes

*

l
Total income

Annuities

*.
: Percentage o f
i total income

_____________ j__________:
Taxable returns with
net income;
Form 104QA 1/
(est.)
Form lobo 8
Under
0.5 ■
0.75 ■
1 «
1.25 *
•1.5 *
1.75 *
2 *
2.25 *
2.5 *
2.75 "
3
*
3.5 "
b
»
b .5 »
5
»
6 »
7
"
8 «
9
"
10 "
11
«
12
"
13
* .
lb
»
15 "
20
«
25 "
30 "
bo ■
50 "
6o
■
70
"
80
"
90
«
100 "
I50 "
200 «
25O »
3OO "
boo "
500 "
750 "
1,000"
1,500"
2,000"
3,000"

b.ooo"

$0.5
0.75

1
I .25

1.5
1.75

2

2.25
2.5
2.75
3
3*5
b

b .5
5

6
7
8

$18.535,b76

(e.st.)
(est.)
(est.)
(est.)
(est.)
(est.) '
(est.)
(est.)
(est.)
(est.)
(est.)
(est.)
(est.)
(est.)
(est.)

10
11

713,792
608,b3i
53b, 568
b71,382
b21,211
38b,693
I,b77,l63
1,012,70b
’ 7bl,733

12
13
lb

15
20
25

30
bo

995.651
66b,l05

50
60

b72,llb

To

150

l,o 6 8 ,ib o

1.978,867
2,753,055
3,bii,b75
3.787.671
3,73b ,015
3,380,826
3,b38,676
5,975,035
3,703.133
2,321,650
1,609,923
1,960,626
1,322,126
1,020,859

826,659

9

80
90
100

3b,930
6OI,8b8
857.6lb

3bo,728
/

200
25O
3OO

boo

500
750
1,000
1,500
2,000

3,000
b.ooo

5,000

5,000 and over
Total, taxable returns
Nontaxable returns;
With nei incomer
Form lObQA 1/
Form lObOt
(est.)
Under 0.5
(est.)
0.5
"
0.75 (est.)
1
(est.)
0.75 "
1
"
1.25 (est.)
(est.)
I .25 "
1.5
1.75 (est.)
1.5
"
2
(est.)
1.75 "
2
"
2.25 (est.)
2.25 " 2.5
(est.)
2.5
"
(est.)
2.75
(est.)
2.75 ■
3
(est.)
3
"
3.5
b
(est.)
3.5
"
b
»
(est.)
b.5
b.5
"
(est.)
5
Total,nontaxable returns
with net income
With no* net income.
Form lobo (est.)
Total,nontaxable return
Grand total

260,507
202,158

165,97?
b66,68b

217,606
129,227
81,98b

95.602
71,511

?3.io b

¡

8,789
3,613
26,202
11.731
73,083,908

7,180,b98
b79,968

2/

162
5,330
7,036
7,570
lo,3bo
9,2b9
7,190
5,9b8
4,988
3.552
b,133
6,560
b ,n b
3.772
3.26b
3,930
3 ,t» 5
2,3%
2,082
1.593
1,346
1,263
1,105
825
762
3 ,i8 b
2,131
l,% 5
1.895
i,b o i
813
660
32b
430
212
85b
188
lbb
198
57
110
?2
%
62

47,977
25,391
lb,966

.b #
•89
.82
.71
.52
.3b
.21
.16
.13
.10
.12
.11
.11
.16
.20
.20
.23
.23
.25
.22
.22
.2b
.23
.20
.20
.22
.21
.20
.19
.21
.17
.19
.12
.21
.13
.18
.09
.11
.2b
.06
.15
.06
.09
.2 4

Percentage
distribution

2/
.11 $
3.78
4.99
5.37
7.3b
6.56
5.10
b.22
3.5b
2.52
2.93
b.66
2.92
2.68
2.32
2.79
2.20
1.67
i.b 8
1.13
.96
.90
.78
.59
.5b
2.26
1.51
1.06
1.3b
•99
.58
.47
.23
.31
.15
.61
.13
.10
.lb
.ob
.08
.ob
.03
lob

.02

*

-

-

-

115,812

.16

82.19

2
_

L

2/
i.b 3
.66
.57
.61
.21
.13
.09
.05
.05
.02
*
.11
-

SJ

2,786
898

6,85b
1,772
3.09b
7.288
I.698
1,017
62b
221
68
25
*
78
•

12,792,210

22,738

.18

16.15

181,b86
12,973.696
86,057,60b

2,362
25,099
ib o ,9 ii

I.3 0
.19
.16

1.68
17.81
100.00

266,566

5b7,580
l,190,7b3
820,959
758,022
705,2bb
b09,b50

ibb,2bo

122,169
7b,6b3

71,160
17,282

Total, FomslObQA
25,715,97b
Total,Forms 10b0
60.3bl .630
Treasury Department, Division of fax Research
1/

2/

t
:

^
ib> o ,9
ii

2/
.16

b. 86
1.26
2.20
5.17
1.21
.72
.bb
.16
.05
.02
**
.06
-

-

a

100.00

2/

Form lObQA (optional return), which may be filed by individuals whose gross Income is from certain
souroes only and is not more than $3,000, does not provide for reporting the amount of net income.,
dross income is tabulated both as total income and as net Income.
Not availably.

*
**

Less than $300.
less than 0.005 percent.

Source;

Adapted from Statistics of Income for 19b2, Part 1, Table

J-Ji.

135

Table 5

Annuities reported on taxable and nontaxable individual returns wifh net income, I9U3, by net income
classes; also aggregates for returns with no net income
(Het income classes and number of returns in thousands; money figures in millions)

:

*
:

:
Returns with net income:
Form 104QÀ Z J
(est*)
Form 1040:
Under $3
(est.)
5
" 1 0
10
" 25
25
" 50
50
" 100
100 « 150
150
3OO
3OO " 500
500 " 1,000
1,000 and over
5 and over
Total Form 1040 A «.nfl
Form 1040 with net
income
Returns with no net income,
Form 1040
Grand total
Total, Form lOUOA
Total, Form 1040
Treasury Department, Division

Total Income

{Total number ;
{Of returns :

Net Income classes 1/

Amount

:

:
{ Percentage

Annuities

: Amount

{distribution

20,341.5

$ 31,026.5

21,563.4
1,099.6
3 8 4 .9
8 4 .8
2 4 .8
4 .4
2 .3
.4
.3

5 4 ,7 76.3
8 ,0 3 3 .3
6,252.7
3 ,1 2 5 .5
1 ,8 1 3 .7
585.3
501.3
1 8 4 .1
161.2
9 4 .3

5I.3
7 .5
5 .9
2 .9
1 .7
.5
.5
.2
.2
.1

1,601.5

2 0 ,7 5 1 .4

1 9 .4

4 3 ,5 0 6 .6

1 0 6 ,6l4 .2

215.5
4 3 ,7 2 2 .0

170.8

2 0 .3 4 1 .5
23.380.5

'

29.15Î

2/

$

88.1
1 4 .0
1 2.3
5 .3
3 .4
.9

: Percentage
:
1 Percentage
:
of
: total income {distribution

2/

2/

.2*
.2
.2
.2
.2
.2
,1
.2
.1
.1

69.5#
li.o
? -7
4.2
2.7

3 7 .0

.2

2 9 .2

9 9 .8

125.1

.1

9 8 .7

1 0 6 ,7 8 5 .1

.2
100.0

1 .7
126.8

1.0
.1

100.0

3 1 .0 8 6 .5
7 5 .6 9 8 .6

29.1
70.9

*

<>f Tax

:
:
1

Besearch

.6
.3
.1
.1

2/

.2

.7
K
p

1
.1

1 .3

Ü

100.0

*

1/ Data for returns ttravlObOA and 1040 with net income under $2 0 ,0 0 0 and with no net income estimated from
ft sample«
^

¡ ¡ S 10i°i (°P*1,>nal

U

i ^ L S i J V w S ° re ^ ^ , 0 0 0» d0eS 004 provide for reporting the amount of net income.
is .tabulated both as total income end as net income.
Nat available.

*

less than 50 returns.

Source:

* « r »* f U e l

IndiTianals whose groe. Income Is from certain sources

Gross income

Individnal
tol and Taxable Fiduciary Income Tax Returns for 194 3. Extract from the Treasurv Bulletin.
United States Treasury Department, June 1947, Tables 4 and 6 (a).
---- ^ -------- *

138

Table 6
Annuities and pensions reported on Individual returns for 19UU by else of adjusted gross Income
(Adjusted gross income classes and money figures excepting averages In thousands)
;

1

Size of adjusted
gross income

i
t
:
>
:

Annuities and pensions

l

Total
number
of
returns

: Adjusted
s gross income

1

• Number {Percentage
:
of
í total
*
°5
. returns : returns

* Amount as a
| percentage
Amount , of adjusted
*
gross
*
income
i

1

1

Average annuity * Average annuity
and pension per > and pension
per return
return reporting
such income : for all returns

Taxable returns»
to. 5 Under $0 .7 5
1
O.75 *
1
«
1.25
1.25 *
1.5

I .5

•

1 .7 5
2

*
■
"

2.25
2.5

*

2.75

*
*

3
3*5

*

U

*
*
*

U.5
5

6

"

7

*
"
*
*
"
*

8

9
10
11
12

13
lU
15

*
■
»
»
«

20
25
30

*
n

50

60
70
80
90
100
I50
200
250
3OO
U00

%

U.5
5
6
7
8
9
10

. ®

11

12
13

lU
15
20

25
30
Uo
50
60

20.U22
11.8UU

*
»
"
*
"

90
100

3.063

•

150

»

200
250
3OO

U.873
1.565
665
351
318
155
159

»
"
“
K

500
750

1.75
2
2.25
2.5
2*75
3
3*5

2,0U5,206
2,950.919
3.U77.U86
3.512.UU5
3.U59.860
3,U03,802
3,130,UU9
2,870,005
2,786,617
2 ,5lU, U55
u, 133,166
2,785.527
1.777.7U1
1.039,236
933.071
U17.756
220,512
151,103
111,991
88,911
67.593
57.375
U6,036
38.563
129, U66
67.537
38.U35
U l,6l0

70

80

uoo
500
750

7.253

U.6 6 8

2.135

“
"

1,000

62

1,000 •

1,500

38

1,500 "

2,000

2,000

*

3,000

U,000 “

U.000
5,000

12
6
2
3
1

3,000 »

Total, taxable returns

U2.35U.U68

$1,337,580
2,586,239
3,921,519
U,825.893
5,6lU ,lU 2
6.37U.683
6,6U 3,l63
6.811.U67
7.307.911
7 ,2 2 2 ,7U7
13,378,813
lO .39U.i97
7,5l6,50U
u, 915,701
5,057.083
2,693,021
1 , 6U5,762
1.279.0U3
1,060,155
931.357
775,780
715,970
620,510
558,U95

3

•52
.60
I.06
1 .3 9
1.U8
1.53
1.51
1.63
1.66
I.9U
2.09
2.01
2 .0 5
2.U9
2 .8 1
3.O9
3*32
3.7O
U.30
U.35
5.O6
U.8 7
5.U6
6.20
6.02
6.55
6.92
9.03
5.66
9.68
7-89

$5 ,0 2 5
9,656
13.637
10.8U5
12,058
10,617
7,238
8 ,5 9 7
7 ,7 1 7
7 ,3 1 3
' 8 .U53
9 .U«7
7 .2 7 5
5 ,3 9 6
8.20U
6.U03
3 .3U6
3 ,1 6 9
1.638
1,626
1 ,2 2 7
1.231
l,06l
1 .3 5 6
3 .5 8 6
1 .9 2 7
2 ,0 5 7
2.U36
I.U36
1 ,0 8 5
1.030
589
36U
367
98U
593
136
51
101
15U
68
6U
53

.38)4
.3 7
•35
.22
.21
.1 7
.11
.1 3
.11
.10
.06
.0 9
.10
.11
.16
.2U
.20
.2 5
•15
.1 7
.16
.1 7
.1 7
.2U
.16
•13
.20
.1 7
.16
.1 7
.22
.1 7
.lU
.1 8
.1 7
.22
.0 9
.0 5
•09
.22
.0 7
.12
.11

$ 388
503
63O
661
682
773
5U3
607
6U6
760
603
711
793
860
831
1.103
1 ,0 2 8
1 ,3 7 1
972
1.12U
1.09U
1,106
1,10U
1 ,7 5 0
1 .3 5 1
1.1UU
1.906
1 .8 9 3
2 ,1 1 5
2 .U77
3 .3 0 1
2 ,9 0 1
2,3U8
3 .5 2 9
3 .6 9 9
6 ,1 1 3
3 ,UOO
2,217
U.5 9 1
11,000
7.556
10,667
17,667

$■ 2
3
U
3
3
3
2
3
3
3
2
3
U
5
9
15
15
21
15
18
18
21
23
35
28
29
5U
59
70
92
1U2
126
119
172
202
379
205
1U5
318
99U
U28
I.032
1 .3 9 5

2

3 3 .3 3

"*6

.oU

3,000

1,000

.5 5

169.660

12.95U
19,208
21.6U5
l6 ,U ll
17,676
13.73U
13.333
lU ,l68
11.938
9.622
1U.018
13.3U9
9.177
6,278
9.87U
5.803
3.25U
2,311
1,686
1.UU7
1,122
1.113

.63#
.65
.62
.U7
.5 1
.Uo
•U3
.U9
•U3
.38
.3U

9£l

775
2 , 65U

2,22U.0 2 2

l,5 0 U ,3 il
1,0U9,789
1.U30.927
907,988
6U5,763
U68.959
. 3U8.712
259.87U
202,711

1 .68U

267,591
1U6.936
95,709

1.079
1.287
679
U38
312
203
155
10U
266
97
uo
23

108,299
68,726

lU

58U.702

22

95,263
53.75U
U6.863

i

0

-

21,22b

lU ,108
6,366
7.719

*
-

llU .7 6 l.3 8 5

• 230,93U

13.329

•V__

735______

u

Nontaxable returns»
No adjusted

gross Income
Under $0.5
0 .5
"
0 .7 5
0 .7 5 "
1
1
*
1 .2 5
1.25 and over
Total, nontaxable
returns
Grand total.
all returns
He turns with adjusted
gross income
under $5 ,0 0 0 U/
Heturn8 with adjusted
gross income of $5,000
and over

• 77U
269
335
U92
590

6
1
U
9
11
21

U2U

'2

.16

701

U

1 3 5 ,0 5 7

.1 5

611

3

U6.3U6

.1 8

1.238

19

1,060
2,066
3 .2 0 8
1.967
1.U92
I.950___

u

191.905
3.260,990
851,628
220,2 5 3
137.609
9 5 .0 U2

2U9 .7 7 1 1/
9 U7.5U8
U76.U87
193 .9 1 8
1U9 .5 0 7
1 8 5 .8 9 2

I.369
7,688
9 .5 8 3
U.002
2,528
2.53U

•71
.2U
I.I3
1 .3 2
1.8U
2 .6 7

U. 757.027

1 .7 0 5 .5 8 0 5 /

27.70U

*58

II.7U3

.6 9

2d

-258,638

•55

181,U03

.5 0

U7,111 ,U95

ll6.U6U.965

UU.6U3.9Ul

90,55U,lUl

221,215

2,U67, 55U

25,9 1 0 ,8 2 5

37.U23

I.52

.22
.6 7
1.01
1.00
1 .0 5

...ns_______

....

Treasury Department, Division of Tax Research
Adjusted gross deficit.
Percentage is meaningless as these returns have no adjusted gross income.
Adjusted gross income less deficit.
Includes all nontaxable returns.
Source:

Adapted from press releases dated June 25, I9U7 and August'21,
Statistics of Income for 19UU. Part I.

19

U7 (Press Service Nos. S-366 and S-U36) for

Annuities and pensions reported on individual returns for 19^-H, toy size
of annuity and pension income

Size of annuity
and
pension income

;
J
;

Number
of
returns

«
:

•

Percentage
distribution

(Thousands of dollars)
Under 0.>1
O J under 0*2
0*2 under 0.->3
0*3 under 0*H
Oo5- under 0*5
0*5 under 0*75

0*75 under 1
1 under 1.25
1.25 under 1*5

22,113

1S o 2$
12o5
S*5

23,139
13,309

5-3

U6.952
32.^39

36,120
2U , 519

s.9

lk*0

1*5 under 1*75

9,166

9*5
lOo 2
3-5
3-5

lo 75 under 2
2 under 2.5
2*5 under 3
3 under 5
5 under 10

3.614
'■ +,909
1.967

UU
1*9
*g

10

under 25
25 and over
Total

26,26S
9,005

3,269

990
2S3 1
76

258, 63s

Treasury Department, Division of Tax Research
* Less than <>05 percent*
Source;

Bureau of Internal Revenue.

1*3
oU

.1

♦

100*0

Table 8
Humber of annuitants currently being paid and amounts of. payments for important annuitant groups

i

Group of annuitants
Federal Civil Serviee employees l/
State and local government employees

As of date
June 30, 19^5

»

Humber
of
:
individualsi
$

208,000

Annuitants, including group plans, *
••
reported by life insurance companies 3/

December 3d» 19^5

560,^3

Individual annuitants reported, by *
; . life insurance companies 3/

December 31» 19^5

U06*866

Social' Security U/
Railroad Retirement

}\j

.

Retired inactive Army and Havy personnel

5 ]

Private industrial pension plans 6/

Treasury Department, Division of Tax Research

Rotei

Payments include disability benefits*

Footnotes on next page*

’
.Average annual
payment
» per individual
i

5 ,2 2 5 $ 82; 3H5,25s

Last month of
fiscal year 19*4-5

2 j

Total annual
payment s.

$' 9^6 ■
’
* »;

177,500,000

i 'fs53;•

:

i

202,921,^97•

126,65^159

February 19^7

1 ,708,800

389,60^,000 >

February 19^-7

197,Uoo

166,9^ , 000-

Fiscal year I9H7/

S7,S05‘ |

lUi, 600,000

'; •

'362 ;

7

311

,

'

228
. -

'8U6; A c • \

2,0‘88

v

<

y

:

Table 8 (concluded)

Number of Annuitants currently- being paid and amounts of payments for important annuitant groups

•FOOTNOTES

1/ V,S. Civil Service Coranission, Retlreaeyt Report, fiscal year ended June 30, 19^5> P ’ 22.
~Zl Partly estinated data (corrected to June b, 19^b) from Federal'Security Avoncy, Social Security Administration,
Social Security Yearbook, 19^5, Table 11, pago IS. Numbers of beneficiaries as of last month of fiscal_year,usually'June; amounts o‘
f benefit payments for fiscal year. Figaros exclude lump-sum survivorship benefits and
•beneficiaries*

.

;

r

v* y '
.
>
)
%i Federal Security Agency, Social Security Administration, Social Security Bulletin, April 1Q^T> P« yfy,
~ Annual payments estimated on the basis of 12 times the payments during the month.of February
of 3
RepreR/ Partly estimated data from*Hearings before, theSubcommittee of the Committee~on Appropriations, House of
”
sentativos, 80th Cong,, 1st Sess.,on First Deficiency Appropriation Bill for 19*7» PP* 3^3» 370» ahd 372;
Budget of thc'Nnitod States Government for fiscal year 19^8, p. 6$1; and information supplied by the War and
Navy"Departments•• Note: .figures do not include personnel'certified to the Veterans* Administration for

3 / The Spectator| Insurance Year Book» Life Insurance» 19^6» PP* 168A~lb94-*

retirement benefits.
ished study of the.Bureau of Internal Revenue shows 6 ,8 6 2 industrial Pension plans
An unpublishet
9 ^ * Fndcr those plans,
there were 3 ^,2 9 0 ,6 0 8. .
employees
participating,
“' approved by the Bureau- as■JofM August
„
_31». 1 .
,.
^
•
or '102% percent of the 9 ,6 6 3 ,5 2 1 total employees of the companies involved. Of these, there were probaoly
about 2 million employees under self-insured plans not covered by life insurance companies*

6 / Not available.

139
Table 9
Civil Service annuitants on the roll by size of annuity
(fiscal 1945)

Size of
annuity
Less than & TOO
100 199
200299
300 399 ,
400499
500 599

Humber of
annuitants 208
1,089
2,552
2,967
3,366
4,546

699
*
799
899
*
999
- 1,099
- 1,199

5,743
5,190
5-894
6,217
6,193
7,251

Ip 200
1,201 - 1,299
1,200 - 1,399
1,400 - 1,499
1,500 - 1,599
1,600 - 1,699

27,510
2,364

600
700
800
900
1,000
1,100

•;

:
s

1,700
1,800
1,900
2,000
2,100

- 1,799
- 1,899
- 1,999
- 2,099
- 2,199
2 ,2 0 0 and over
Total
Average annuity

; Percentage v
i distribution l/

.2%
1*3
3*0.
3*5
3*9 .
5*3
6,7

6 .1
6*9
7.3
7 »3
8*5

■

32c3

2*8
1*4

520
464
335

»6

347
198
194
JLOl
87
659

*4
•2

«2
.2
.1
*8

85,225

1 0 0 .0

.5
«4

#966

Treasury Department, Division of Tax Research
Percentages are rounded and will not add exactly to total*
Source:

U* S. Civil Service Commission, Retirement Report,
. fiscal year 1945, Table 20, p »1 33»

APPEiTDIX B
Report of the Canadian P.oyal Commission on- the Taxation of
Annuities and Ranily Corporations 1/
;T.he Royad.Commission on the iDaxation of Annuities and Family;
'Corporations was appointed by the-Committee of the Privy Council of
Cahada in November l^h4 cti- the-suggestion of the Minister of Finance.
It was instructed to investigate arid-report upon (a) the treatment
under the Canadian Income War Tax Act of annuities, pensions, and
various other periodic.payments Mof such a character that it is not
obvious Whether they are solely income or solely-capital or partly
the•on§/an& partly the other,” and (b) the taxes imposed under
Canadian law on income and successions or inheritances arising upon
the death of a person owning a substantial interest in a private or
closely held corporation which has accumulated an earned surplus.
The Commission was also instructed to consider possible changes in
the existing burdens and. methods of treatment applicable to such
payments and successions. ¿/

Zj

The major findings of the report with respect to the taxation
of annuities and pensions are reviewed briefly-in the following
sections. The recommendations of the Commission with respect to
the treatment of pensions and annuities were adopted under legis­
lation enacted in 1945,. with further minor modifications enacted in
19 H 6 . k/c,
’
■
/
A.

Evolution of existing law ¿/
1*

i

Contractual and Covernraent annuities
it

:
Contractual annuities such as those sold'by insurance companies
or. the Dominion (Government were not treated as taxable income from
I.917 to 1929* In 1929» a Judicial decision in the. Kennedy case

l y Report of the Royal Commission on'The Taxation of Annuities and
Family Corporations, 19^5. Ottawa, King* s Printer! 19 P , 99 p p .
2/ Members of the Commission were Mr. William C. Ives, retired Chief
Justice, Trial Division of the Supreme Court of Alberta, Dr. D.A,
"■ Mac&ibbon, ..Winnipeg, Manitoba, 'and' Mr, •M,'W.MacKenzie,2iontreal,P.Q,*
¿/ The Report of the Commission, submitted ..to the Minister of Finance
March. 2 9 ». .19^5» includes two major parts: -Part I¿'Annuities and
other Annual dr Periodic Payments and Part II, Taxation of Earned Sur­
pluses
of Private or Closely Held Corporations; a "memorandum
of reservation's:by D r . MacG-ibbon; and three appendices.
b/ See CCH Canadian•Tax Service ,Vol. 1, Pars . 10-4^9 ,. 10-^ 5 2 , lO-b-53*
10~h64, 10-405,10^595, and 10-62ba and b. 10-625. 10-627, 10-628
and related references.
5/ Rased on Report, op. cit., pp. lb-20, 25 - 2 9 , and 32-3 6 .

2
ÀPPEHDDt B
found an annuity purchased from the Dominion Government... to he taxable.
In I93 O» In order to protect the sale of Government annuities and at the
same time not discriminate against insurance companies, an exemption up
to $5,000 was accorded Government annuities and ’’like” contractual annuity
payments by a licensed insurance company. In 1932, this exemption wag.re­
duced to $1,200 for new contracts. The $5,000 exemption vras continued,
for prior contracts,. The Commission was unable to determiné with certainty
the practice of the Income Tax Division from 1930 to 19^-0 in treating an­
nuities other than those covered under the above-mentioned exemptions.
In 19^+0, the exemption of Government and ” like*1 annuities was
abolished except as to pre-existing contracts.- Life annuities were
henceforth taxed in, full, however, in line with a-liberalised attitude
toward annuities under English case,law, after lÇhO ’’annuities certain”
or ’’term annuities” we re taxed only on the interest element. The method
used *in separating the interest ancL capital elements was to divide the
present value of the annuity at the date the annuity matured by the
number of payments provided in the annuity contract, the quotient being
thé capital element in each annuity payment. The Royal Commission sum­
marized the then prevailing treatment- of contractual annuities as follows!
(l) Government, and ’’like” annuities taken out prior- -to.'Hay 26, 1932,
are exempt up to'$5,000 annually* The combined exemption for a husband
.and wife is.the .same as that for a single individual. The exemption is
restricted to the amount.of the annuity specified-in the annulty contract
before .June 2 5 , 19 ^Q» regardless of any option or contractual right to
enlarge the annuity, unless the additional premiums were paid prior to ;
that date.
:V
■(2) Subject to the same: limitations, -Government and ’’like” annu­
ities’ taken out between May 2b, 1932 and June 25, 19^-0 are exempt up
to $1,200 annually.
(3)
In the case of annuities purchased (or insurance policies ma­
turing) after June 25, I9 H0 ,. annuities., certain are taxed only as to the
interest element, while life annuities (including those with a guaranteed
tern) are taxable in their entirety* 2/
(U) t/here a term annuity passes on the annuitantrs death to the
estate or a béneíiciary, the present worth is taken for succession duty
purposes and the interest element is taxed as income to the estate or
beneficiary,
\

l/
2/

'

*

.

-/er- S

- r .. /’’

•

'/

_

- >

g'’

..p

■ V

.

;
•

Report, op* cit«. pp# 17-13.
Where an individual has tv/o separate contracts, one f o r ‘an annuitycertain and the -other for a deferred life annuity thereafter, the
result is in effect a life, annuity with a guaranteed term, Hever-^
theless, the'annuity certain is taxable only as to«the interest
element, the deferred life annuity being taxable in full.

if

-'3
APPENDIX 3

.*"** "
2»

Annuities under wills and trusts :

'

From 1919 to 1930 , an annuity received'under-a will or trust was
taxable income -to the.¿recipient ■to the- extent it was -payable out ©f the.
income, of the will:■or / t r u s t A f t e r the Xenhedy*'decision •in 1 9 2 9 ,• the ';
Finance ¿Department adopted the .practice of taxing such annuities infull whether paid out of income or capital.
..After the Uhitney* case decision in 193& exempting an annuity paid
from an estate, the law was amended in 193 ^ specifically to tax all
annuities or other payments under a will or trust- whether paid-out of .
income or capital, In order to mitigate hardships under this provision,
a further amendment was added ih 19 ^3 • Under this amendment annuity
o'r other annual payments out 1of corpus under the provisions of a will
or trust effective prior to JaniXary 1* 19^-h were -exempted up to $ 1 ,^00
a year-,
•
'
;.. .
• however, in a subsequent court decision ih the O ’Connor case, in­
stallment payments of a legacy v/ere declared exempt, and the present
tax status of/annual payments-under a will or trust- is uncertain. ■ ’
\
3*

Sickness, a c c i d e n t a n d disability payments

rr%
v-*i'

- The Pwoyal Commission noted .that while there v/as no published ruling on this
point,, it w a s , the Canadian practice to-exempt payments under-'the terms
of sickness-, accident, or disability contracte'. I n 1 9 ^2 ,. woifcrien*s com­
pensation payments provided under provincial or dominion compensation • ;
acts were specifically exempted. The Commission felt that such specific
provision might raise the question whether other sickness, accident, or
disability benefits-, might by inference;be considered taxable- income,: l/v
h.

Pension, superannuation, and other similar payments

In 1919»- employee contributions to a pension fund or plan were
allowed as deductions, the pension itself to constitute-taxable income'
to -the recipient, .--lump-sum ret if ement;-settlements and survivdr bene- *
fits were included in taxable income.by amendments in 1927 and 19 ^1 ;
respectively. In 19*42, in order to avoid undue burdens on lump-sum
payments under pension ‘plans, it was-provided that only'one~* third of
such payments -should be .included in taxable income. •*-In 19 hh, it was
provided that lump-sum settlements by*an employer t o ’a retiring employee outside of an approved pension plan v/ere. to be taxed one-fifth
in the year received and one-fifth in each of the succeeding four years,

1/
2/

Report, op» c it,. n 20,
:
T
If the employee dies before he has fully reported such.'a lump-sdm
./Settlerqent, the remaining balance- is tax-free,. Gifts,' not. deducted
b y the employer* and 'indemnities-' for loss'of office are exempt to
the recipient, k ..•

i
1 41
- U a ppen d ix b

y.

J

Bòtri the One— tnird rule and the five—year averaging treatment*are de­
signed to afford a measure.of.relief against■lumping of income without
undue complications, 1/
•
1
.
In 1 0 3 6 , the deduction for contributions' by an employee'to pension .
funds vras limited to S3 OO in any4 one year, This was amended in 19 >Lrh- to
allow an additional ^00 deduction for contributions with resoect to
previous services when the taxpayer was not a contributor and to extend
the deduction to retirement contributions to approved plané paid by a
trade union member as part of his union dues.
Prior to 19^1 employer contributions to pension funds or plans
were considered deductible as-general expense. Beginning in I 9 U 1
various limitations were placed on the employer's right to deduct such
contributions.
"In I9 2 S, trustees of pension funds were given the right to elect
to have the income of the fund exempted from taxation in the trustees*
hands. However, it.was provided that, if such election was exercised,
the employee-forfeited the right to deduct his contributions, while
his retirement pension or lump-sum payment would be exempt in the
proportion'that the amounts paid by him into the fund after the •
effective date of the election bore to the total amount- paid in by
him. 2/ Such an election applies•only where there is a separate
pension fund, administered by trustees and not where the plan is
handled through group annuities purchased from the Government or
insurance c onpani es.
In summary, the Royal Commission noted that under then prevail­
ing provisions, there-were two types of pension-fund situations.In one type,
with a-pension fund where the trustees elected to be exempt,the employee's
contributions were not deductible but his pension was exempt. Where
some: of the employee's contributions had been, deducted and^some had
not, the pension to the employee or the survivor was exempt in pro­
portion to the non-deducted contributions. Thè sane applied to lump­
sum payments to employees.
In the other type of pension plan, with -no
separate fund, where there was no election, the employee's contributions
were deductible within prescribed limits'but his pension was wholly tax­
able to .either the employee or the survivor. A lump-sum payment to the
employee was one-third taxable. In both types, lump-sum payments to
survivors were taxable income fo- the extent of one-third in ;tho year

17 Report, op. citi, pp. hh-US.
’
,
■S.7
practice, where there was a separate fimo., the trustees necessarily
elected to be exempt, as it would be virtually impossible for the
fund to meet its obligations if it were taxable. Report, op. bit..

- 5 -

appbiidix b

received, l/ In "both situations, the income earned by >the fund, cr by the
combined employer and employee contributions, there "being no soparawO
fund, vra,s not tamed as it accrued, 'and provisions relating to the de-V
duction of employer contributions were identical. Both types of pensions
were treated alike for succession duty purposes. _2 /
B.

findings and recommendations
1*

Contractual'- annuities

:After discussing different economic concepts of income, the report
concluded that (a) the Canadian income bas not . adopted for fiscal pur­
poses the "income produced *1 concept and (b) it is inconsistent with
this concept and unfair to tarn annuities in their entirety, from the
broad standpoint of social policy, the report indicated that it is
undesirable to tax the return-of-capital element in an annuity, thus
penalizing orderly arrangements for the necessary consumption of
capital.
It further indicated that there was no basis for "prejudice”
against life annuities on the grounds that they turned capital into
current consumption in view of the current emphasis on main«aiming
consumer expenditures and fears expressed about over— saving, f/ in
addition, them report noted that overtaxation, of life annuities could
be largely avoided under then prevailing Canadian law by. the expedient
of purchasing two separate, contracts, one tor a te.pu certain covering
the individual1s life expectancy and the other for a deferred life
annuity thereafter.
.
Ehe following technique of taxing the income element in annuity
payments was recommended! 5/
(a) Subtract from the sum total of expected annual payments the
purchase price or discounted value o/ of the annuity. j.ne result
It should be noted that the five-year averaging provision previously
described applied only to non— contractual lump-sum payments, i.e.,
those made, outside a. pension plan.
Report, op. cit., p. 3 5 * .
.>• « ..
Based on Report, cpB cit., pp. 20 - 2 5 , 29 - 3 2 , and 3b-47. '
Report, op. cit., p. 2 5 .
..
_ T, ,
, »
This method was suggested to the Commission by Hr. A.
uatson, eniei
Actuary of the Dominion Insurance Department,
■
Under the recommendation and as adopted under 1^U"Ç—46 legislation, tne
discounted value at the time payments- began as, distinct from the pur­
chase price would apply as the cost basis in the case of the installment purchase of a, deferred annuity. This treatment -exempts interest
accrued prior to the effective date of the annuity. Safeguards have
been adopted, however, to prevent tax avoidance where the taxpayer
deposits a large sum with an insurance company in purenasing a longdeferred annuity.
In such cases the Minister of National Revenue
has the discretionary power to add to the income portion the
interest earnings on the purchase price accrued prior to the effective
date of annuity payments. See Canadian Tax S crvice, Yol, 1, OuH, Bar.

~ 6 -

APPSïIDÎX 13
gives the total income to he taxed during the period of the annuity.

lo)

Divide this.amount by the mimo er of years the.i>aynents are expected to run. l/ The quotient- is the annual taxable amount *
. Under this method life-expectancy tables would he used in determin­
ing the taxable portion of annuity payments. ‘
The report -suggested that
annuity contracts bear o.n their face-a statement shoving the taxable
portion or that•vendors of contracts supply such .information for annui­
tants, It stated that it would be poss rple to adapt this method to
different types of contracts, extending it to :the entire annuities
field. The^advantages cited for the proposed .method, are its nsimplicity
and certainty . 0 2J -

2.. Annual or periodic payments under a will or trust
With reference to annual or periodic payments received under the
provisions of a ’./ill or trust, the report declared the 'existing tax
treatment of such payments to be indefensible.
It referred to the
triple taxation of capital accumulated and paid out of an estate in
annual payments;
twice under the income tax and once under the suc­
cession duty.
It noted that, if the testator placed safeguards around the dis­
tribution of money from his estate, such payments 'were subject-, to
■income tax whether out of corpus or income, whereas -if the beneficiaries
‘were allowed to withdraw capital suns at any time in any amount, no income
tax was imposed on such capital vdthdr avals. The result, the report indi­
cated, was to encourage lump-sum settlements. The report also stated
that the then prevailing provisions created uncertainty as to what periodic
payments would be deemed 11annual payments” and therefore fully taxable.
It recommended that the ”alien principle/ of taxing capital”
be
abandoned and that, the treatment of annual': payments under wills or. trusts
adhere to the basic principle embodied in Canadian income tax .laws of
taxing income from the use of capital but exempting capital itself*
Under this rec-ommendation, payrient-s under the provisions of a will or
trust- vbulci be taxable only to the extent they were made from the income
of•the estate oxytrust.
3*

Pension
funds
—U
-»■«M.. ,

The""/report* found.considerable inequality of treatment as between
pension-fund situations which are identical in substance* After con­
siderable Analysis, it recommended that all pension plans be put on the
. .
...
,
"
""g.
■ ■■■■,■'
.....
.....

'if-This""period would be the individual’s life expectancy in the case of
a life annuity,

2 / Report ^ op. cit., pp. 29-30»
¿7 Report, op. cit:, ‘-p. 3 2 *

■•
#•*

;

,*

;•

7I

APPSKDIX B
same footing by allowing the current deduction of ■
employee °°nyibutions

the tension paynefits to be taxable income in the hanas of U

rtCrp i . . J

tne pension P w
.
n.f .«ii ?vDoroved pension funas be
It also recommended that tne earnings 01 a n apu
&
exempt in the hands of the trustees,
A further recommendation was that the then p r e v a i l i n g ^ l i » U «
the deduction of employee contributions be removed. I, «
M * * » * .
situation would be controlled adequately by the requirement of^vheappl-ov,l of the elan by the W n n n o s liinister. It was. now.v.r, urg
if some upper limit on such deduction be deemed necessary ^ae g a t i n g
limit should be raised and reviewed from time t o t i n e “ ‘h i ? / c
current interest levels and other economic c o n d i t i o n s J
nection the C omission expressed its view that specific P*ovi
.
the tax law, ever, if somewhat arbitrary, are nevertheless prefer»
to reliance on adninistPatlye discretion.
The report also indicated the existing maximum limit on the de~
duction of employer contributions should be removed. However, dtHSUygest.ed'that continuing supervision should be added to the requirement
of initial approval of the pension plan.
The report noted that it would make for greater theoretical equity
to tax currently the accruing earnings on savings invested in pe.nsxon
funds, but such an attempt would make the declaration oi taxable income
unduly complicated.
h„

Survivor benefits and lump-sum settlements

fhe Commission recommended that continuing pensions to survivors
be treated as taxable income to the survivor in the same way as i
paid to the employee if he had. lived. It was further suggested vnat
the discounted value of such pensions should not oo treated a p .
'
of the deceased at the time of his death for succession duty P ^ p o s e .
This treatment was regarded as consistent with .no position ox t.ie
Comnissior. that continuing pensions to survivors are. a uef.er^d reward,
for services, notwithstanding that the services are rendered oy on
person and the pension is received by* another.
She report recommended, the continuance oi (a) the spreau-i¿\a
nses
non-oontraotual lump-sum settlements over 5 years for income az p P
(and its extension to payments as compensation for loss of o.i o )
(b) the present rule of taxing one-third of lump-sum withdrawals of
•pension-plan contributions which have previously been deuuctea
^
'emolovee (with the addition of the proviso that where an «sp-O.v

1 T Ihe report indicated that, whatever arrangement ^

note vatn
to individuals vrho had not deducted their contributions -¿i ...

2/

~J

should err in favor of the taxpayer.
i*,***»»« imposed
As adopted under the I9 H 5 legislation, a $900 annual lim-t
on the deduction. .A similar $900 annual limit was applied * 0 > £ e
Auction of the employer's contributions with respect to tu. 1 -*employee. See CCH Canadian Tax Service, Vol, Z, -Par, zimo <z**b.

- g -

143

APPBHDIX 3
to take employment elsewhere the retirement payment he exempt to the ex­
tent it is used to transfer contributions from one fund to another)* It
also recommended that lump-sum payments to survivors he treated the same
as if paid to the employee. These recommendations were adopted under the
19^5 legislation* In 199-6, however, both the one— third inclusion rule
and the five-year averaging method were superseded by new provisions ap­
plicable to lump-sum payments under a pension plan or upon retirement
made after June 27, 1 9 ^ . Under the new provisions, the taxpayer has
the option of treating such lump-sum payments either as income in their
entirety in the year received or as specig.1 items of income tameable a.t
the average rate applicable to his previous year’s income. 1 /
5*

Persons outs.ide pension plans

The Commission was friendly to, but rejected numerous suggestions
by,witnesses that the postponement of tax on sayings for retirement be
extended to the self-employed or other persons without access to a
pension plan.
It was indicated that such extension would be inequitable
unless it covered life insurance and various other forms of savings.
Furthermore, extension of the principle of exempting current savings
would enlarge the problem of taxing lump-sum withdrawals and involve
serious administrative difficulties.
b*

Summary of recommendations

Zj

The following is a summary of the Commissions recommendations with
respect to pensions and annuities:
(1) The return-of-capital element in contractual annuities should
be exempted. The method of taxing the income portion used in connection
with tern annuities (dividing the.aggregate income by the tern of years
the annuity is to run) should be extended to life annuities using life
expectancy as the term.
(2 ) Annual or periodic payments under a will or trust should be
taxable only to the extent paid out of the income of the estate or
trust.

( 3 ) The earnings of all approved pension funds should be exempt
from tax in the hands of the trustees. Employees’ contributions to
such pension funds should be currently deductible and the pensions .
fully taxable when received.' Where employees in the past have not * ‘ ■
been entitled to deduct their contributions,only a.proportionate part •
of the pension should be taxable. Existing limits on the deduction
of employer and employee contributions to pension funds should be
removed. Pension funds should be subject to continuing official
supervision.

1/ Sdo GCH Canadian-Tax. Service, Vol. 1 ,Par$• 10-^53» 10~U70h, 10- 9 2 0 , and
10-921.
2 / Report* op* cit.t p, Hj,

-

- 9~

APPENDIX B
(h) Survivors 1 pensions should he taxable as income to the same
extent as if paid to the employee# The value of a survivor*s pension
should be exempt from succession duty.

( 5 ) Existing methods of including in taxable income one— third
of taxable lump-sum settlements from a pension fund or plan should be
continued* The practice of spreading lump-sum' retirement payments ,
(other than from a pension fund;or plan) over 5 years for tax purposes
should be continued and extended to payments for loss of office* 1 /
(6 ) Life insurance or deferred annuity premiums should continue
to be non-deductible for income tax purposes*

1/ As previously noted, this recommendation was adopted in 19^5 but,
superseded in 19 ^+6 *

APPENDIX C
Formulas for Determining Benefits under Present Social
Security and Railroad Retirement Provisions l/

I,

Social security old-age and survivors1 benefits
A.

Primary benefit — the sum of the following tiro amounts:'
lc

The sum of AO percent of the first $50 and 10 percent
of. the next (*.200 of average monthly -wage, l/ plus

2.

One percent of the amount in (1) multiplied by the
number of years in -which worker received credit for
annual wages of ^200 or more.

If the primary benefit as computed is less than $10, it is
increased to $10,
B. 'Old-age benefits - monthly benefits to family of retired
worker as follows?

C.

D.

1.

Retired worker — monthly payments equal
primary benefit if he retires at age 65
or later«

2.

Fife (over 65) of retired worker — one— half
of primary benefit.

3*

Child (under 18) of retired -worker — one-half
of primary benefit.

Survivorship benefits - monthly benefits to family of
deceased worker as follows:
1.

M d o w (over 65 or with children under 18) —
three-fourths of primary benefit.

2*

Child (under 18) - one-half of primary benefit.

3.

Dependent parent (over 65) - one-half.of
primary benefit. 2/

Maximum benefit

Maximum total old-age or survivors1 benefit for family
of a worker is the lowsest of the following three amounts:
1/ To receive payments under the programs, beneficiaries must meet
other qualifications, such as the provision suspending benefit pay­
ments -when the beneficiary’s earnings in covered employment reach
$15 a month, in addition to those mentioned belowT. ,
2/ Payable only if wo rker left no widow or children under 18.

2
APPENDIX C

1.

Twice the primary benefit.

2.

80 percent of average monthly w age.

3.

$85•

’•

Maximum is applicable ..only when total •family benefits based on
the wor.ker’s wages .-exceed.. $20*"- Moreover, if maximum-is applied,
it must not reduce total benefit below $20*
E*

Minimum benefit

. ••••■

Minimum total family benefit is |l0j if formula gives
smaller, amount, the total benefit is raised- to $10»
F.

.

Summary of smallest^and largest benefits currently payat>le_
,

'

•*

* Smallest benefit j Largest b enefit a/
.J'Monthly j Annual :•.Monthly : Annual
Old-age benefits:
Retired worker (primary benefit)
Worker and wife (or worker and
one child) - l-i/2 times primary
benefit
..■ 'f ... v ,.
v$$%■■;!

$10.00

$44

$528

66

792

. 33

•396

$120

15*00 ■

180.

10 *00

120

Widow and one child - l-l/4 times
primary benefit

12.50

150

.35

Widow and txro children - 1-3/4
times primary benefit

17*50

210

77

924

Widow and three or more children b/
(or retired worker and two.
children) - 2 times primary
benefit

20o00

240

85

1,020

Survivorship benefits:
Widow - 5/4 of primary benefit

.

660

f

coverage from 1937 to 1946, inclusive*
The benefits computed under the general rule (2—1/4 times^the^
orimary benefit) are reduced to. indicated size by the limitation!
regarding maximum benefits.

145
-3 appenudc
I I *

c

.

R ailro ad re tire m e n t b e n e f its
- A.

Retirem ent a n n u itie s (n o n ^ -d isa b ility )
1.

G eneral formula f o r monthly r a t e - take
2 p ercen t o f the f i r s t $50 o f average
monthly compensation, plus
l ~ l /2 p ercen t o f the next $ 100 , p lu s
1 p ercen t o f th e next |1 5 0
and m u ltip ly the sura o f th ese t h r e e : amounts
by the number o f y e a rs of se rv ice» .

,
2*

1

The amount so computed may be s u b je c t to
red u ctio n i f worker r e t i r e s b e fo re age 6i>.
TJorkers -with 30 y ea rs o f s e r v ic e may r e t i r e
a f t e r age 60 s u b je c t to red u ctio n o f b e n e f its
- by l / l 8 0 t h f o r each month below age 65 i n the
case o f men, with no such re d u c tio n in the
ca se o f women#

3#

Maximum annu ity —fat p re s e n t, the maximum number o f
y e a rs of s e r v ic e th a t can be counted i s 30 , l /
„so th a t maximum a n n u ity i s $4. tim es 3 0 , or $120
monthly, o r $1 , 4-40 an n u ally *

4#

Minimum annu ity ~ th e lo w est o f th e fo llo v in g
th r e e amounts:
a . $50
b# $3 m u ltip lie d by th e nianber o f y ea rs o f s e r v ic e *
c# .A verage monthly compensaticn#
Such low est amount a p p lie s b e fo re any re d u ctio n f o r
e a r ly re tire m e n t as d escrib ed above#

•• • -

1/

’

■ Minimum i s a p p lic a b le o n l y ,i f worker has a t
l e a s t 5 y ea rs o f c r e d ita b le s e r v ic e and has a c u rre n t
co n n ection with, the r a ilr o a d in d u s try a t tim e o f .
retirem ent#., I f th e se co n d itio n s a re not m et, g en eral
formula in (.1 ) above a p p lie s and an n u ity may be
exceed in g ly sm all, depending on p erio d o f se rv ice#
I f th e computed monthly payment i s l e s s than '"‘2 # 5 0 ,
th e an n u ity may be paid q u a r te r ly o r in a s in g le
lump sum equal to i t s commuted value#

I f s e r v ic e b efo re January 1 , 1937 I s counted, “y ea rs o f s e r v ic e “
a r e lim ite d to 3 0 . Employees who have more th an 30 y e a r s ’ s e r v ic e
a f t e r December 3 1 , 1936 may c r e d it a l l t h e i r s e r v ic e a f t e r th a t
date# T his means th a t no one can count more than 30 y ea rs o f
s e r v ic e u n t i l a f t e r December 31> 1966#

I

APPENDIX C

B.

Survivorship benefits
1*

Basic amount ■«£ the sum of the two following amounts:
a,

b.

The sum of 40 percent of the first, $.75 and
10 percent of the next *-175 of average monthly
compensation*
*
1 percent of the amount.in (a.) multiplied by
the number of years after 1936 in which worker
received credit f o r '-200 dr more .of annual
compense tLon*

If the basic amount as computed is. less than *10,
it is increased to flO.
2*
*

Monthly benefits to family of deceased .worker:

.:

a,
b.
c.

3t

.
'
t

f
t ... -■

;(\ ;•

...

-V. ; ghgt - V

N

Vadow (over 65 or with children under 18) —
3 /4. of basic amount.
Child (under 18) •- l/2 of basic amount.
Dependent parent (over 65) — i/2 of basic
amount,l/

Maximum total benefit for family of a deceased
•worker is the lowest of the following three
amounts-:
*

a*
* b.
• '\c.

Twice the basic amount*
*
.
80 percent of average monthly wage.
$ 120 .-'
•- ^xtUmtR m ***** *», ...

t

Maximum is applicable only when total family"
benefit exceeds $20. Moreover, 'if maximum,
is applied, it must not reduce, total benefit
below $ 2 0 ..
4.

ft.

- -------

,

..

*.

Minimum total family benefit i£> $10; if formula
gives smaller amount, the total benefit is
raised to $1 0 .
w ..t. • ■ 1

, - • ,

.

<

1

1

- - --

-

|

.1

r r r r -1

.

r . -------- r ^ ~

|

r - - * ---------

------------- 1........ ...

1j Payable only if worker left no widow or children under 18.

................. ■ ■ ■ ■ — ■

146
- 5 APPAllDIX C

C#

v

Summary of smallest1 £and 'largest benefits currently
payable

\

•:

•;:Smallest benefit
, Monthly ‘ Annual

Retired worker1s annuity a /
Survivorship benefits:

y

*/

•Largest benefit
, Monthly 7 Annual

$120

$i,^Ho

oj

Basic amount
’widow - 3 /^ of
basic amount

$10

$120

52.25

627

10 §J‘

120 .

39.19

U70

Widow and one child —
14 times basic amount

1 2 .5 0

150

6 5 .3 Ì

7 SU

Widow and two children —
1- 3 /U.times basic amount

1 7 .5 0

210

. 3JUÌA.

Widow and three or ibd&*
children ej - 2 times
basic amount

20

pbo

: 10 U. 50,

1,097 '

1,25^

Tree
Treasury
tsury Department, Division of Tax Research
a/

largì

$300
y

c/
d/
e/

Ret i"
duraBarg«
$2 5 0 .
Mini:
The 1
amount5; are reducedto indicated size by the limitations regarding
maximum benefits.

.APPENDIX D
acuities

A.

a nd pensions

1/

Annuity Income

Annuities have been a popular form of investment in recent years
and, "because of the nature of annuity income, special treatment is
required in the preparation of a Federal income tax return.
There are several forms of annuities, of which the most common
are the following types sold by insurance companies:
(l) Single»“Premium immediate life annuity.-A person (hereafter
referred to as the "annuitant11) may purchase, for a flat sum,, i.e., a
single-premium payment, an annuity policy which provides him with a
monthly or annual ’income for life, beginning at once. In regard to
the payments to be made by the insurance company after his death,
there are two types of policies:
(a) Nor*refund basis.-Upon death of the annuitant, the policy
terminates and no further payment is made to any person-that is,
the portion, if any, of the'premium (capital) hot recovered^by
the annuitant through the receipt of annuities during his life­
time is forfeited.
(b) Refund basis.— In consideration for the payment of a
higher premium than that paid for a nonrefund policy, the re‘ fund policy provides in part for a full return of capital,
either to the annuitant during his lifetime or in part to
the annuitant during life and the balance to his beneficiary
after his death,
■ ,(2 ) Single—premium deferred life annuity.— The annuitant pays the
specified premium but defers receiving the annuity income .until after
a stated future date. This policy also may be procured either on the
nonrefund basis or on the refund basis.
(-3 ) Ari-pnal premium deferred life annuity.—The annuitant contracts
to pay an annual premium beginning-at once, for a life annuity which
will begin at a specified age, as 65 years, on either the nonrefund
basis or the refund basis. In-some policies of this type, the annui­
tant may elect to stop payment of annual premiums and to have payments
of annuity begin at any desired time.
,
(U) Joint and survivorship annuity, nonrefùnd type.—For a stated
cost, as £ 1 0 ,0 0 0 , the"contract provides that a specified annuity will
be paid to the annuitant for life, then to a designated second person
for life, with no further payment to any person.

37

Article ITo« 23 from Your Federal Income Tax ¿19^6 Edition) ,
Treasury Department, Bureau of Internal Revenue, pp» 61— 64,

- 2 -

3 47

AEPSLÏDIX .3}

( 5 ) Joint and survivorship annuity with term certain^-This is a
refund type of annuity policy which includes a guaranty of the return
of part, if not all, of the premium (capital) either to the annuitant
during his life, or in part to the annuitant during life and the ,
"balance to his beneficiary after his death.
((5) Annuity with endowment insurance, also known as 11retirement
Income policy.H— In consideration for the payment of annual premiums
for a, specified number of years, as 30 years, the policy provides
for the payment of an annuity for life beginning at a stated future
time, as 65 years of age, and may guarantee the rexund of the entire
premium (capital)' through a cash surrender value, or througn insurance,
or ndeath benefit,w payable to a beneficiary upon death of tne annui­
tant, Such, a policy may provide, for instance, $1,000 insurance for
each $10 monthly income at age 6 5 , with income payaole ior a fixed
period, such as a term of years, or for an indefinite period such as
for life, or for life and a guaranteed fixed period such as a guar­
anteed minimum period of 10 years; however, the policy may provide
for a smaller payment and a longer guaranteed term.
vJhile thé courts have not agreed upon a standard definition of
the term ^annuity,** the Bureau of Internal Bevenue lias descrioed it
as na stated sum payable periodically at stated times during life,
or a specified number of years, under an obligation to make the pay­
ments in consideration of a gross sum paid for such obligation, which
gross sum is exhausted in the making of the periodic payments.n
In such annuity contracts as those described aoove a: portion ox
each annuity payment represents a partial return of the principal
to the annuitant, and the balance of each payment represents interest
on the sum or sums paid for the policy or contra.ct. pince the cost
of the annuity .may be recovered, tax-free as n return of 'capital, only
that portion 01 the payments which, represents interest on tne cost ox
the nolicy or contract is taxable income, and for purposes of uniform­
ity "the law provides in effect that this portion^snail be considered
.as equal to 3 percent of the total cost of the policy until there has
been excluded from gross income, usually over a period of years, an
amount equal to the principal sum paid for the policy. Thereafter,
the entire amount of the annuity is taxable income.
Annuity income, accordingly, must be reported in the 51odePal
income tax return. The right to the annuity income may have oeen
purchased by payments made from your earnings or savings, or oy the
investment of tax-exempt proceeds which you had received as the
beneficiary of a life insurance policy issued to another; it may
have been a gift to you from someone else; or you may receive it as
a beneficiary and survivor of a deceased annuitant—— in ee.ch case
your income from the annuity is, subject to the income tape.
If the annuity derives from a straight single-premium annuity
contract, then the cost to be shown would be the amount of tne
single premium paid for the policy. If the annuity is received by
the policyholder of an endowment insurance contract, payable in
installments to the policyholder, then the cost is the sum of tne
premiums pa.id for the policy.
If you received the annuity as a gift
from another, your cost is the same as your donor*s cost,.

APPENDIX D

~

~

In addition to the cost of the policy, as stated^above, there must
he considered the amount of the annuity income received during the
year# » ■ tvl
;:c
1 '••’•
■
• •.
^
Turn to Schedule A on page
2 of your income tax return for 194b.
(on the "oa.qk of page l) and enter on line 4 of this schedule .the total
of the annuity payments received during 194o* Jo ascertain how much,
if any, of this total represents a non.taxabie return, oi. capital, ahd
how much is taxable, enter the total cost of -the annuity on line 1 ^ ...:
of the schedules subtract on line 2 the1 total of the amounts, received
tax-free.in „1945-and prior years (that is, subtract the .total^ox the
amounts received i n .all prior years less 3 perdent,of line 1 for each
year during which the.annuity .has. been received since 1933/, and enter
the remaining cost or capital,; if any, on line 3* ¿
• Compare this figure with the 194b annuity on line 4 and i f t h e
latter is the larger* enter the difference- on line 5* This will show
that the. entire cost has now.been recovered tax-free, and that all
.. •?
annuity payments received from that point on'are taxable# If,^however,
the l^tó^ammity.. does, not exceed .the remaining cost, write the-.-excess

qr¡gr

on line 5 as ;,hone;0
.:
"
: * : ...
;■" .The taxable income to.be entered on line 6 of the schedule is;then
thc figure..on.line 5,. -or-3. percent of line. 1, whichever is greater, except,that;if the total annuity, received in 1946 is. le'ss than 3 percent o f .line 1, the taxable income -oh line 6 should not be more thanthe income .receivecL When ;the firs t annuity payments, under the con- tract are received, they, usualny.do not cover an entire taxable year,
and"the portion representing taxable income ..may. be ascertained by
•
prorating, the X-percent -amouht to the number of months ior:which the
payments ..are made,: To do this.■divide the. 3-per cent figuro by 12 and
multiply by the number of' -months’. Assume, for .-instance., -that the cost
of your annuity is $8-f000 and that during 4946, the first y e a r .in which
any annuity payments ¿he madc> you'receive* two- monthly .payments of ylOO
each -beginning ITovcmbpr ,1. “Then 3 percent -of $8,000 is v2n0 .for a-full
year % $240_ divided by 12 equals $20; $23 mu31 ipl.led ioy 2, •the number y
of months for which the 'payments;are made, equals .$.4Qy and. in determin­
ing the taxable income to be entered on line, b of Scnedule A,, this is
the amount for the S'tmoiath'period' to oe compared .with■.the ligure -on
line 5 of Schedule A to •see:which, is the greater.,,. ■ , .
, . :
If you have- recovered your’cost tai-cree in prior years, or if.
the entire cost of y o u r .annuity -was .paid; by a.: former, employer,- you.
may omit lines .1 to 5 « .inclusive/'and enter directly on.,line.6 the
total amount received in -.1946, and theroaiter, the v/hole annuity .
income each year .must-.be entered as taxaüle income#
Pensions or -retirement' pay received from eirployees.,i...trusts should,
be treated, in the.same...way •as annuities; If thq trust .is one which
meets the statutory- tes.ts for exemption from income, tax* tn-e amounts, if any» contributed by you. as an employee constitute., .your-.basic- c.ost
of the annuity; if you nade no payments to the trust., your,cost is
zero* If, however, the.-1.rus.t. is not-exempt from, tax,.», contributions
to the trust-.by, the--employer are treated as adcJitipnal compensa.tion
to you as the- employee., and are taxable t o ‘you,when credited to the.
trust, if yqur rights ,to a future'annuity woull not be forfeited by
your resignation or.discharge:occurring before the retirement date»
Amounts thus taxed to you as the employee may be treated as part ox
your basic cost of the annuity*

..*

APPENDIX D

B. .^Annuities, Pensions, and Retirement,Pay Distinguished
The terms ’’annuity,” "pension,11 and "retirement pay" are of ten, con­
fused., with each other. Sometimes these terras are usé! to describe à
plan' in which,ah'individual invests some of his own money*— either with
an insurance company or with his émployer— in order to"assure himself
that*he will receive a steady income when he'reaches a .certain age.
At other times, the same terms are used to describe payments which
are made by an employer entirely.out of h i s ’own funds to reward a
faithful employee.
..
Eor income tax purposes,, all of these plans are, in effect,
treated alike so that the rèçipieht of an.^nnclity, pension, or re­
tirement pay is allowed to recover his own investment,' if any,.taxfree but is required to pay tax on the remainder of the benefits
that he receives, vas explained in the.first part of this article.
Therefore, in those cases where the employer pays the.entire cost
of a pension, the retired employee has no cost to recover and his
entire pension is taxable as if it were a payment, of.additional wages
and salary.
An exception to this rule occurs vdiere the law specifically exempts
certain payments from' income tax, such as. the pensions which, the
Government pays t.o war veterans and their families, and the old-age
benefits which are paid by. the Government as administrative expendi­
tures in the interest of the general welfare of the public under the
Eederai social security laws.
As explained previously, an annuity, generally speaking, is a
form of investment wherein you purchase the right to receive a monthly
or annual income for- life. A portion,of each annuity payment received
represents a partial nontaxable return of the principal or purchase
price, and the balance of each payment- represents taxable income.
The original idea of a pension appears^ to have been a gift or
gratuity made to a former employee on- account of past services which
had been fully paid for when rendered, but it. developed into a de­
ferred compensation for services as an inducement to secure continued
service from employees. Accordingly, a pension or a retirement allow­
ance paid entirely by the employer represents, for Eederal income tax
purposes, amounts paid.solely because of services. They.are regarded
as additional compensation for services and the entire amount of each
payment is subject to income tax unless expressly exempted from tax by
lav;. These amounts may be entered in your income tax return for 19^-6
as "wages" (line 1 or 2 of a.Withholding Statement or item 2, page 1,
of Eorm lOUo)e However, if you file your return on Porn lOUO and
prefer to enter your pension in the annuity schedule (Schedule A,
Page 2, Eorm IQUo), you nay do so.
Eor instance, an employee works for many years for a civilian
manufacturer and then retires because of disabilityor advanced age*
His employer continues,; to pay him a salary or ’'pension'1 because of
his past s e r v i c e s t r e a t i n g the payments as current expenses for
compensation. This pension is compensation subject to income tax
and it is subject to the withholding of income tax by the employer.

APPEEDIX

J)

- 5- ■

After the employee's death, the employer may continue the payment
of the pension, to the employee's widow, Two types of cases occur«. In
one, there was no previous agreement that any payment would he made to
the widow,- hut the employer made such payments voluntarily for a limited
period, usually not more than .2 year's, after the employee's death, in
recognition of the services which he had rendered. In such circumstances,
the payments to the widow are gifts and are not subject to- income tax in
her hands, although they may be deductible'by the employer as business
expenses, In the other type of case, there was a contract, a corporate
bylaw, or other understanding between employee and employer that after
the former's.death the payments of salary or pension should be made to
the widow, or other beneficiary« Since a legal obligation was created
under which.the widow could I'ecover from the employer any unpaid amount
due, the pension received by her is treated as'income taxable to her.
Since she is not an employee but receives tfre pension as a beneficiary
of the deceased employee, it is not subject to withholding*
Officers in the armed forces receive what is called "retired pay"
or "retirement pay" after they retire from active service* They differ
from retired civilians in that they are subject to recall to active
duty, and their retirement pay has been held to represent compensation
not only for services previously rendered but also for holding them­
selves ready to respond to ,a further call to duty. .. Prior to 19^42 all
of such retirement payments v/ere taxable as compensation regardless
of whether retirement was due to age, number of years of service, or
disability* Eow, however,, if they retire on account of injuries or
sickness resulting from active service in the armed forces, the "dis­
ability retirement pay " is exempt, for 19^2 and later years« by
express provision of law.> However, payments made for retirement on
account of age or service are still taxable as compensation and are
subject to the withholding of income tax.
Government "pensions" .and "compensation" paid to war veterans who
are no longer in active service are usually paid on account of dis­
ability. ' As used here and in existing pension laws as amended in
19 ^ 6 , the term "pension" refers to non-s.ervice-connect'ed money bene­
fits, and the term "compensation" means money benefits (other thaii
retirement pay) received oh account of the service— connected death
or disability of a veteran resulting from service in any war* All
payments of "pensions" and "compensation" to veterans were formerly
treated as taxable compensation, but since 1.935 t&e# have in general
been exempt from tax by express provision of law.
Between the ordinary commercial annuity, on the one hand, and the
compensatory pension or retirement payment, on the other hand, there
is a third type of payment met with in the Federal Civil Service
Retirement System, teachers' retirement systems in many States, and
police and fire departments in numerous cities. ■Under the provisions
of a statute or of a contract, as the case may be, the employer with­
holds from the employee's pay each pay day a specified percentage of
his pay, and transfers the withheld amounts to a specified fund,
usually called a "retirement fund," to which additional amounts are
added by the employer. When the employee retires, on account of age,

APPENDIX D

o -

number of years service, disability, or other agreed reason, the
employer pays him thereafter a monthly retirement allowance which
is derived in part from the employee1s percentage contributions to
the fund and in part from the employer’s contributions to the fund«
Por .Federal income tax purposes this type of retirement pay is
treated as an ’’annuity1' and not as a "pension,” The cost or purchase
price of the retirement annuity is the total amount paid into the
retirement fund out of the employee’s salary» The treatment of his
salary and retirement pay in this type of annuity are explained in
further detail in article No„ 1J of this series and in the first
part of this article.
The distinguishing characteristic that marks the "pension" as.
different from the "annuity" for income tax purposes is, therefore,
that in general the pension is paid entirely out of the employer’s
funds on account of services, whereas the annuity is paid., in'part
at least, out of a fund to which the employee has contributed.
His contributions to the fund are regarded as an investment of his
earnings, and the retirement annuity is the fruit of his investment,
thus placing this type of income in the same general clas-s of invest­
ment income as interest.

149
TREASURY DEPARTMENT
Washington
POR IMMEDIATE RELEASE
Friday, November 28, 19^7

Press Service
No. S-546

The Secretary of the Treasury today announced the sub­
scription and allotment figures with respect to the current
offering of 1-1/8 percent Treasury Notes of Series A-19^9, to
be dated December 1, 1947, open to holders of Treasury
Certificates of Indebtedness of Series L-194-7* maturing
December 1, 1947, arid 2 percent Treasury Bonds of 1 9 4 7 ,
maturing December 1 5 , 194-7.
Subscriptions and allotments were divided among the'
several Federal Reserve Districts and the Treasury as follows:
Federal Reserve
District

Certificates
Exchanged

Bonds
Exchanged

Total
Exchanged

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St, Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

$

$ 13 , 919,000

$

TOTAL

74,268,000

1 ,166 ,903,000

595.403.000
1 0 7 .1 2 5 . 0 0 0
9 6 .7 2 0 . 0 0 0
1 2 8 .6 9 1 . 0 0 0
8 8 .7 1 3 . 0 0 0
2 5 8 .8 2 7 . 0 0 0
7,137,000

362,640,000
12.594.000
47.011.000
3.905.000
4.125.000
74.308.000
6 .5 0 7 . 0 0 0
1 6 .0 8 3 . 0 0 0
30.651.000
4.282.000
51.037.000
_____ 17,000

$2,906,373,000

$627,079,000

78.430.000
172,780,000

57.756.000
7 3 .6 2 0 . 0 0 0

8 8 ,1 8 7 , 0 0 0
1 ,5 2 9 , 5 4 3 , 0 0 0

91.024.000
219.791.000
6 1 .6 6 1 . 0 0 0

77.745.000
669.711.000

.
,

113 6 32.0 0 0
112 8 03,0 0 0

159.342.000
92.995.000
309.864.000
7,154,000
$3,533,452,000

By arrangements made between the Treasury and the Federal
Reserve System, the System's holdings of maturing certificates
amounting to $138,800,000 will be presented for cash
redemption on December 1.
0 O0

TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS
Tuesday, December 2 iq 47
---- *
--- :------- —
■ ----- --

Press Service
No. S- 5 4 7

the tenders0 ?or"l SOO^OO^So^or S “ 0 ® * 84 last Gening that
Treasury hills to be dâted
thereabouts, of 9 l-da|

»ys
*1» . »iS s?Jsst9JUS%"t/t
at the Federal Reserve Banks on Deoeaber6!.
194?’ Vere opened
1

~

tuie

The details of this issue are as follows;
Tntoi'
P e

for '
-

597,300,000
1,201,105,000 (includes $3 5 , 3 7 4 000 entered
In
k l i n at
- J °the
T t average
i t l V e b“price
* 5 ^ shown
^ p tbelow)
ed ^
in full

Average price - 99.76.1 Equiv. rate of discount appro*
per annum
0
^

0 944 /

'

Rahge of accepted competitive bids:
S

f

: i : ? 6 ™ E,! l v - v t
Wf •'

;f di“ ™
-

‘ * ? < * , » . « « P„
,
0.949^
"

^
M

(35 percent of the amount bid
fnr at
»-f- the
t>io low
^
oia lor
price was accepted)
Federal Reserve
District

Total
Applied for

Total
Accepted

Boston
New York

$

$
3,710,000
1,115,181,000
A,132,000
10.770.000
3.950.000
630,000
20.359.000
3.580.000
4.970.000
15.920.000
5.615.000

3,710,000

1 * 4 8 5 -,2 7 1 , 0 0 0

Philadelphia

6.522.000
10.770.000
3.950.000
630,000

Cleveland
Richmond
Atlanta
Chicago

A 3 ,6 0 9 , 0 0 0

St, Louis
Minneapolis
Kansas City

3.580.000
5.100.000
15.920.000
5.625.000
12.613.000

Dallas

San Francisco

12.288.000

TOTAL

$1,597,300,000
0 O0

$1,201,105,000

151

TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE,
Tuesday, December 2, 1 9 4 7 .

Press Service
Wo. S-548

Secretary Snyder announced today the appointment of
James J. Saxon as an Assistant to the Secretary.
Mr. Saxon has been employed by the Treasury Department
for the past 11 years, serving as a Securities Analyst in
the Office of the Comptroller of the Currency from 1937 to 19^0 and with the Foreign Funds Control and Office of Inter­
national Finance from 1940 to date. In 1941, he vas designated
Treasury Attache to Francis B. Sayre, U, S. High Commissioner
to the Philippine Islands. He accompanied the Commissioner
to Corregidor after invasion of the Islands,where he was
engaged in activities to prevent gold, silver and other liquid
assets from falling into the hands of the enemy. When the *
President directed Mr. Sayre té evacuate Corregidor, Mr. Saxon
also was ordered to leave. He returned to the United States
via Australia.
During the War, Mr, Saxon held many posts as a Treasury
representative in Hawaii, Puerto Rico, Africa, Italy, France,
England, and Sweden. Prior to his present appointment as
Assistant to the Secretary, he was assigned to the Office of
International Finance as Special Assistant to the Director.
Mr. Saxon was born on April 1 3 , 1914, in Toledo, Ohio,
and is the son of Mr. and Mrs. Samuel J. Saxon of that city.
He received a Ph*B. 'degree from St. Johns College in Toledo
in 1 9 3 6 and later attended Catholic University and Georgetown
University School of Law? Mr. Saxon is married and resides
at 6 3 1 7 Woodside Place, Chevy Chase, Maryland. He has a small
son, James Joseph, Jr.
0O0

■
TREASURY- DEPARTMENT

1 5 ?

Washington
(The following address by Secretary Snyder
before the Houston Chamber of Commerce,, at
the Rice Hotel, Houston, Texas, is scheduled
for delivery at 9sOQ PJML. C.S.T». on
December 6. 19A7. and is for release at that
time „)

Me, in the United States, are experiencing today the greatest measure
of prosperity in our history,
But, at the same time, we are living in a world of economic instability.
Because of this, we are deeply concerned today as to how we can best pre­
serve and strengthen that driving force of our own economy which has brought
us to our present levels of high productive activity.

We cannot underestimate the involved economic and social problems of
this era, or the great impact their improper solution would have upon our
whole society. But, on the other hand, there is no real doubt of our
capacities to deal resolutely with these problems when we fairly appraise
the past accomplishments of the American people, when we take into account
their present abilities and achievements, and when we consider future
prospects.
For we have only begun to realize the immensity of our national re­
sources, Te have only begun to measure the great reserves of national
assets which hold such tremendous promise for the future development of
this country.
The fundamental economic potential of the United States lies in the
great resources of this Nation and, so strikingly, in the individual and
community efforts of its people.
Houston, in itself, is an inspiring example of that community of effort
which has collectively fostered our national growth and power. The devel­
opment of your city has reflected the general trends of all progressive
American communities, although in so^p respects it has outdistanced them.
Since the days of Sam Houston, yo\ir citizens have been determined to
gain municipal greatness. And, under the aggressive leadership of your
illustrious sons, you have not only reached this goal, but in so doing,
have made an important contribution to our national economic life.
Such men as Jesse Jones, Mill Clayton, Joe Evans, and F. M-# law,
with whom I have had the pleasure of personal association, are among the
roany^ Houstonians who ably carry on your tradition of community and national
service, > Their efforts and the prevailing common interest of your citi­
zenry assure continued great strides in Houston*s growth.

S-549

Situated as you are in the economic center of the rich Gulf Coast
Area, with its vast resources of oil, gas, chemicals, and agriculture,
the import an ce of Houston and its surrounding area to our national growth
is widely recognized,
Tremendous fields of natural gas which have been discovered along the
Gulf Coast are the basis for a rapidly growing natural gas industry,
Houston is right in the center of the development of the industrial
chemical industry. This industry has expanded nearly fourfold since
1939 — one of the truly remarkable achievements in recent progress,
Numerous other factors have played important roles in the progress of
your city. Among these has been the remarkable development of the port
of Houston,
Houston is the world1s leading spot cotton market as well as the
largest cotton shipping port. It is an important center of the rice indus­
try, and for'the manufacture o f ■oil field tools and supplies,
Present business activity in this area is apparently above the national
average, as indicated by recent bank debits and department store sales.
All of these factors which mark your development are symbolic of the
economic progress of the country as a whole.
For, in the slightly more than two years since the end of the war
we have accomplished a most remarkable national production record. And
eve n . m t h this record breaking production, the domestic and world demand
for our goods, has, in some lines, far exceeded our capacity to supply.
The pent—up need for American goods, however, is in itself a strong support
to our continued prosperity,
As members of a rapidly expanding business community, you gentlemen
of Houston are. fully aware of the close connection 'between economic and
trad©.development, Texans, living in a region where growth and progress
are a tradition, nec-d not be reminded of the remarkable increase-of income
in their state.
Income payments to individuals in Texas rose from approxi­
mately 62,500,000,000 in 1940 to $6,750,000,000 in 1946, The share of
Texas in the total national income advanced from
per» cent to 4 per cent
in those years,
At the same time, there has been a parallel increase, o f trade between
Texas and other states. As measured by railway freight, for example,

Texas re ceiv e d ‘f rom o th er s t a t e s in 1940 about 25 m illio n to n s , w hile in
1946 the tonnage reached alm ost 43 m illio n t o n s . The ra ilw a y f r e ig h t
movement to your s t a te n e a r ly doubled in t h is s ix —y ear p e rio d .
Concurrently, shipments from Texas to the rest of the country in­
creased in the same proportion. These figures indicate that this- great
increase of production, incomes and employment in Texas, which stimulated
rado^Tdth other states, has been a boon to producers not only here but
3lso in other sections of the United States,

~ 3 ~

15 4

During this period of the growth of Texas, symbolizing our national
expansion, it is interesting to note vihat has been happening in the inter­
national field* Fifty years ago, when Canada was largely an agricultural,
mining and lumbering country, the exports from the United States to Canada
were relatively small* But as Canada developed industrially, it became
one of our foremost foreign markets* In 194-6 the value of shipments to
Canada was about 15 per cent of the total United States exports. In this
half century, Canada was producing more and more of the manufactured arti­
cles in which the United States itself specializes. Yet the actual value
of trade between the two countries increased Several-fold, and Canada1s
share in U. S. exports more than doubled.
The same general trend is visible in our trade with Latin America,
although economic development has not been as rapid in that area.
In Mexico, for example, there has been much new activity and a great
increase in the output of the textile industry, in iron and steel, in
automobile tire manufacturing and in many other types of production. Hand
in hand with this expansion of domestic output has come Mexico*s demand
for United States merchandise, a demand which has risen far beyond any
previous levels. As a result, our exports to Mexico in 1946 exceeded
$500,000,000, compared with only $63,000,000 in 1939. Mexico has become
a much more valuable market for our exports, in large part due to its
success in developing its productive resources which in turn has brought
generally increased national income and stimulated a greater demand for
our goods.
In the Western Hemisphere — an area in which we are so vitally
interested — the general economic development of "the nations to the
south of our borders will'increasingly enlarge our total tra.de. Experi­
ence has shown that as those countries become more productive and more
prosperous, they will become better markets for United States goods and
better partncrs in the world economy.
If further proof is needed of the close connection between trade
and the economic development of individual countries, let us look at the
contrasting economic life of Europe and Asia. The greater part of the
world*s trade before the war was not between'the poor under-developed
colonial areas on the one hand and the industrialized western world
on the other. Much more important was the volume of trade among the
countries in the Western European and North Atlantic group of nations.
It was the experience of these nations that the industrialization and
general development of their neighbors invariably increased their own
trade and the benefits they derived therefrom.
Industrial progress in our m o d e m world is not the same as selfsufficiency. Instead, it usually means a fuller measure of cooperation
and an increase of mutually profitable trade in goods and services.
So our interest lies not in attempting to hold down our neighbors
to the status of suppliers of raw materials, but rather in lending them
a helping hand, in making available our capital resources and our
technological knowledge. In this way, we may share in supplying the
increased demand for goods created by expanding national incomes.

Through judicious loans and investment, our Government and our indus­
tries have been making an effective contribution to the development of the
Latin American Republics 9 The economic potentialities of our sister
republics are limitless, and their growth-mil bring a mutually beneficial
expansion of our foreign trade#
At the Conference n ow meeting in Havana, this country is taking the
lead in putting uhe finishing touches on the Charter for an International
Trade Organization, This organization is designed to encourage interna­
tional trade and sound economic development among all member nations *
Your city and your state, with their far-flung trading activities, have
a real stake in these efforts to substitute a rule of reason and common
interest for cut-throat competitive economic nationalism in the trade
relations between countries.
These then, are among the elements of great strength in our country
today. We have vast physical resources upon which we can count if we
conserve and use them wisely* We have a virile and intelligent c i t i z e m y
possessed of energy and a sense of community spirit^ Our domestic and
foreign trading system assures us maximum benefit from the interchange
of goods and services on which our high standard of living depends,
Most of the so-called obstacles to continuing economic well-being
will disappear if we will submerge immediate self-interests and concen­
trate on long-range advantages — if we will appraise our present problems
realistically and seek to solve them through the united effort of govern­
ment, management, capital, labor and agriculture*
During the war it was necessary for Government to step into production
and markets to ensure the adequate supply of materials required to prose­
cute the war* But now that hostilities have ended, we have returned to a
system of private enterprise* We look to American business to expand its
production* And to date, American business has made magnificent progress
in this direction*
For our factories are turning out the highest volume of production
since the war — much higher than in any previous peacetime year. The
Federal Reserve Board*s index of industrial production stood at 189 in
October, as compared with 113 in 1937, the highest yearly average prior to
the outbreak of the war in Europe*
The volume of freight carried by the railroads is at a new high
peacetime level.
Agriculture production is at record heights*
The nation has more people employed in civilian occupations than
ever before in history,
Electric power output reached the highest level on record last month.
Crude oil production reached a record peak during the last weeks bf
Octobert

-5 -

1 58

New homos started in September and October are estimated at 92 000
in each month, Tnese figures are apparently the highest on record for
the months mentioned.
These present indices of prosperity measured along with our prospects
for industrial replacement and expansion, our road building programs,
our municipal construction and the urgent demand for housing, form a tre—
mendous backlog of business activity for future years*
I am not trying to paint an over-optimistic picture, but I do believe
that if we take full advantage of these favorable conditions, the American
system of free enterprise can carry us forward to new heists of sound
prosperity, based on full production, wide distribution of goods and
expanding trade.
But, in assuring our national economic welfare, the Government of
the United States has a very real responsibility and obligation** -Our
government must, without Question, and particularly in these momentous
times, retain a strong financial position,- Such has been the primaxy
fiscal objective of President Truman, and, as Secretary of the Treasury
I have sought always to work toward that goal,
One of the most effective steps we can take in government towards
fiscal soundness would be an equitable revision of our tax structure
which toaay does not fully meet the requirements of our modem expanding
economy,,
Many elements in the present tax system were adopted under condi­
tions vastly different from those which confront us currently. Some of
these measures were adopted during depression conditions; others during
the extraordinary circumstances of war#During the past years, when we were striving to increase Federal
revenues, first to prepare for, and later to fight, the costliest war
m history, we were compelled to give high priority to those measures
of taxation that would bring in sufficient revenue, . Of necessity ade­
quate attention could not be given to considerations of equity and to
the incentives which would be needed after the war for the expansion
of American industry and trade.
But, we must now devise a strong balanced tax program** We need
a tax system that will not deter the American public from oroviding
markets for this expansion, .
In meeting this need, the Congress must resolve many difficult
questions. For example, -what specifically is there in the present
tax system that lies in the path of continuing expansion of American
business and industry? What is there in the present tax system which
if unchanged, would sooner or later interfere with expanding markets 9
for the products of American industry? What are some of the
inequities which have crept into the American tax system and, tolerable
during conditions of war, should now be eradicated?

- 6 -

157

In the Treasury we have devoted a great deal of time and study to
provide the American public and the Congress with the best answers to
these questions*
To date we have released twelve major tax studies^ fifteen others
are in process and are scheduled for release during the next several
months ,

I believe that it would be well to repeat here those fundamental
principles of a sound tax structure which I stated before the Ways
and Means Committee on Hay 19, 19471 as follov/ss
"The tax system should produce adequate revenue; It should be
equitable in its treatment of different groups; It should interfere
as little as possible with incentives to work and to invest* It should
help maintain the broad consumer markets that are essential for
high-level production and employment „ Taxes should be as simple to
administer and as easy to comply with as possible. While the tax system
should be flexible and change with changing economic conditions, it
should be possible to achieve this flexibility without frequent revisions
of the basic tax structure, A stable tax structure, with necessary
flexibility confined largely to changes in tax rates and exemptions, will
make it easier for business and Government to plan for the future,"
The complex excise tax structure is among the matters which will
require especial attention in the process of modernizing the tax system
to make it compatible with the continued expansion of American business
and industry.
Some of the present excises enter into business costs and operate
to disturb competitive relations. An outstanding example is the tax on
transportation of freight. Other excises produce either unimportant
amounts of revenue or are unduly burdensome on individuals with lowincomes, Still others would, under less favorable business conditions, make
it difficult to carry on profitable enterprises,
While it is true that the existing excise tax system has not been
detrimental to business during the war and postwar inflationary period,
I believe that under more normal conditions it could not be continued
without harmful effects,
I further believe that in revising the tax system it is important
to bring about greater equalization in the taxation of business income
regardless of the legal forms of organization, Present law produces
important differences in tax burden on business income, depending upon
whether it is conducted in the form of an unincorporated or an
incorporated business. While complete uniformity may prove to be
neither desirable nor practicable, some greater degree of equalization
would appear to be attainable. In this connection attention should be
given to the problem which has,received so much discussion in recent
months, namely, the double taxation of dividends.
There is not sufficient time to discuss all of the important
elements of a fiscal and tax policy which I believe would have the
maximum salutary effect upon our domestic economy. There is one other
phase, however, which I w/ould emphasize.

15 8
- 7As Secretary of the Treasury, I must consistently and forcibly
advocate the policy of providing sufficient revenues to meet current
obligations and to permit steady liquidation of the public debt..
The United States Treasury closed its last fiscal year with a
surplus for the first time in 17 years. Certainly during this present
period of prosperity, we should maintain a balanced budget with
adequate provision for debt reduction.
It Is a sobering thought that although our public debt has been
materially reduced from its peak, it still remains at the staggering
figure of $258,000,000,000,
The public debt of the United States is a contract between the
government and the people of this country. Government bonds are
held by individuals, by insurance companies, by banks, by educational
and charitable foundations. We must not weaken public confidence
in government obligations by ignoring our debt at a time when we
should reduce it,
I want to make it perfectly clear that I am not opposed to tax
reduction, I believe tax reduction feasible and proper after we have
met certain necessary prerequisite obligations.
In closing, I would like to restate, ray strong conviction that
a financially sound government is the first requisite to permanent
welfare and is the keystone to the security of a people,
I am convinced that before reaching conclusions on tax reduction,
the Congress should first consider foreign aid within a balanced
budget; second, debt reduction; and third, equitable tax revision,
Hhon the necessary prerequisites have been met, tax reduction will
become fee.sible and proper.
We must remain a nation strong economically, strong financially,
and strong in the determination to exercise our responsibilities of
leadership.
Devotion to the principles of a free democracy has been the
compelling force behind the progress of our system of enterprise. And,
under the continued guidance of these principles, we will persevere as a
powerful influence for worldwide economic stability and genuine world
peace.
oOo

159
TREASURY DEPARTMENT
Washington

FOR IMMEDIATE RELEASE,
Thursday, December 4, 1947

Press Service
No. S-550*

Secretary Snyder today announced the appointment of
John W, Gunter as Deputy Director, Office of International
Finance.
Mr. Gunter was horn on February 17, 1914, in Sanford,
North Carolina, and attended the University of North Carolina,
receiving a Ph.D. degree from that institution.
Mr. Gunter has been employed by the Treasury Department
for the past 7 years, and since 194-3 has served as a
Treasury representative in various overseas posts . His
most recent assignment was in London, England, and his
family is residing there at the present time.
Prior to his appointment In the Treasury Department,
Mr. Gunter served as an Instructor at the University of
North Carolina.

oOo

160
HREASURY DEPARTMENT
Washington

FOR RELEASE, MORNING NEWSPAPERS,
Friday, December 5* 19^7»_____

fhess Service'
, No* S-;
!p51

The Secretary of the Treasury, by this public notice,
invites tenders for $1 ,2 0 0 ,0 0 0 ,0 0 0 , or thereabouts.of.9 1 -day
Treasury bills, for cash'and in exchange for Treasury bills
maturing December 11, 19*1-7, to be issued on a discount basis
under competitive and non-competitive bidding as hereinafter
‘provided. The bills of this series -will be dated December 11,
19^7, and will mature March 11, 19*1-8, when the face amount,
will be payable without, interest. Thby will be is sued.., in, bearer
form only, and in denominations of $1 ,0 0 0 , $5 ,0 0 0 , $1 0 ,¿0 0 ,
$1 0 0 ,0 0 0 , $5 0 0 ,0 0 0 , and $1 ,0 0 0 , 0 0 0 (maturity value).
Tenders will be received at Federal Reserve Banks and
Branches up to the closing hour, two o ’clock p.m., Eastern
;Standard time, Monday, December 8 , 19^7. Tenders will not be
received at the Treasury Department, Washington. Each tender
must be for an even multiple of $1 ,0 0 0 , and in the case of compe­
titive tenders the price offered must be expressed on the basis
:»bf,.1 0 0 , with-hot more than' three decimals, e. g., 9 9 *9 ?5 .
Fractions may not be used.' It is urged that tenders .be made, on
the printed forms and forwarded in the special envelopes which
will¡ be supplied by Federal Reserve'Banks or .Branches on appli­
cation therefor.
’ 5* '
*
Tenders will be received without deposit from incorporated
banks and trust companies*and from responsible and recognized
dealers in investment-securities * Tenders from others must be
accompanied by payment of 2 percent of the face amount of Treasury
bills applied .for, unless the tenders are accompanied by an
express guaranty of payment by an incroporated bank or trust
company.
Immediately after the closing hour, tenders will be opened
at the Federal Reserve Banks and Branches, following which public
announcement will be made by the Secretary of the Treasury of
the amount and’price range of accepted bids. Those submitting
tenders will be advised of the acceptance or rejection thereof.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or In part, and
his action in any-such respect shall be final. Subject to these
reservations, non-competitive tenders for $2 0 0 , 0 0 0 or less with­
out stated price from any one bidder will be accepted in full at
the average price (in three decimals) of accepted competitive
bids. Settlement for accepted tenders in accordance with the
bids must be made or completed at the Federal Reserve Bank on
December 1 1 , 1 9 ^7 , in cash or other immediately available funds

- £

-

or in a like face amount, of Treasury tills maturing December 11,
1 9 4 7 , Cash and exchange tenders will receive equal treatment.
Cash adjustments ¥111 be made for differences between the par
value of maturing bills accepted in exchange and the issue price
of the new bills.
.
.
The income derived from Treasury bills> whether interest
or gain from the sale or other disposition of the bills, shall
not have any exemption, as such, and loss from the sale or other
disposition of Treasury bills, shall not have any special treat­
ment, as such, under the Internal Revenue Code, or^laws amendatory
or supplementary thereto, :The bills shall be subject to estate,
inheritance, gift or. other excise taxes, whether Federal or State,
but shall be exempt from all taxation now or hereafter imposed
on the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States shall be con­
sidered to ,be interest. Under Sections 42 and 117 (a) (1) of
the Internal Revenue Code, as amended by Section 115 of the Reve­
nue Act of 1941, -the amount of discount at which bills issued
hereunder, are. .sold shall not be. considered to .accrue until such
bills shall: be: sold, redeemed or otherwise disposed of, and such
bills are -excluded from consideration as capital assets.
Accordingly, the owner of Treasury bills (other than life insurance
companies) Issued hereunder need include in his income tax return
only the difference between the price paid for such bills,
whether on original issue or on subsequent purchase, and. the amount
actually received either upon sale or redemption at maturity during
the taxable year for which the return is made, as ordinary gain
or los s,
Treasury Department Circular No. 4l8, as amended, and this
notice, prescribe the terms of the Treasury bills and govern
the conditions of their Issue,. Copies of the circular may be
obtained from any Federal Reserve Bank or Branch.
0 O0

1G2
TREASURY DEPARTMENT .
Washington
FOR RELEASE, MORNING NEWSPAPERS
Saturday, December 6 , 19^7,

Press Service
No. S-552

Secretary Snyder today released an exchange of letters
between himself and Sir Stafford Cripps, the Chancellor of
the Exchequer of the United Kingdom, whereby it is agreed
that it is now appropriate for the United Kingdom to resume
withdrawals against the line of credit established by the
Anglo-American Financial Agreement of December 6 , 1 9 4 5 .
In reviewing the events leading to this exchange of
letters, Secretary Snyder recalled that withdrawals against
the ^credit were temporarily discontinued in August on the
basis of a mutual agreement between the two Governments.
The action was taken simultaneously with the instituting of
emergency steps by the United Kingdom to stop an unanticipated
and excessive drain on her resources which followed the grant­
ing of free convertibility of sterling in July.
Secretary Snyder cautioned however that while progress
had been made toward the working out of a satisfactory program
dealing with the convertibility of sterling, the serious
economic conditions existing in the world would delay for some
time the restoration of full convertibility. In this connec­
tion he pointed out that there are, however, no restrictions
on the convertibility of sterling held in current accounts of
United States residents.
Secretary Snyder stated that the resumption of drawings
against the line of credit at this time would permit the
United Kingdom to continue the purchases in the United States
necessary to maintain its present austerity program and
hence would not add to inflationary pressures in this country.
Attached are the texts of letters exchanged by Secretary
Snyder and Chancellor Cripps .

162
-

2

-

Treasury Chambers
Great George Street
London, S. W. 1
b t h

December, 1 9 ^ 7

My dear Mr. Secretary*.
I refer to the exchange of letters of August 20, 19^7
between our two Governments and to the discussions pertaining
thereto whereby it was agreed that for a temporary period His Majesty's Government would not notify any further with­
drawals against the line of credit established under the
Anglo-American Financial Agreement, and it was contemplated
that consultation would be undertaken with respect to a
constructive program which would be best calculated to
achieve the objectives of the Agreement and at the same time
to conserve British dollar resources in this critical period.
As you know, representatives of our two Treasuries have
been in frequent consultation and considerable progress has
been made toward these ends. Accordingly it now appears to
me appropriate for His Majesty's Government to resume
drawings against the line of credit.
I should lixe to take this opportunity to reaffirm the
intention of His Majesty's Government to adhere as closely
as possible to the objectives of the Agreement at all times
and to implement these objectives fully at the earliest
possible time.
Yours sincerely,
/S/

STAFFORD CRIPPS

Chancellor of the Exchequer

Honorable John W. Snyder
Secretary of the Treasury
Washington 2 5 , D. C.

. . . .

v

163

- 3 December 5> 1-^47
My dear Chancellor:
I have your letter of December 4, 194? advising
me of the desire of His Majesty»s Government to resume
withdrawals against the line of credit established
under the Anglo-American Agreement of December 6 , 1945;
The frequent consultations between the representatives
of our two Treasuries lead me to confirm your understand­
ing that, as contemplated in the August 20 exchange of
letters between our two Governments and the discussions
pertaining thereto, it is now appropriate for your
Government to resume drawings against.the line of credit.
. 1 am pleased to receive your reaffirmation of the
intention of your Government to implement fully at the
earliest possible time the principles embodied in the ,
v,
Anglo-American Agreement and to adhere to them as clèsèly
as possible at all times.

Sincerely yours,.
./S/ JOHN W. SHŸDER
Secretary of the Treasury

Right Honorable Sir Stafford Cripps,P.C., M;P.
Chancellor of the Exchequer
Treasury Chambers
London, England
•Go

STATUTORY DEBT LIMIÎAflflN
AS OF NOVEMBER 30» 19¿7 :

December 5> 194-7

2.S4

Section 21 of the Second liberty Bond Act, as amended, provides that the face
amount of obligations issued under authority of that Act, and the face amount of
obligations guaranteed as to principal and interest by the United States (except
such guaranteed obligations as may be held by the Secretary of the Treasury), "shall
not exceed in the aggregate #275/000,000,000 outstanding at any one time« For
purposes of this section the current redemption value of any obligation issued on a
discount basis v/hich is redeemable prior to maturity at the option of the holder
shall be considered as its face amount»"
The following table shows the face amount of obligations outstanding and the
face amount which can still be issued under this limitation?
Total face amount that may be outstanding at any one time
$27% 000,000,000
Outstanding November 30, 1947
Obligations issued under Second Liberty Bond Act, as amended
Interest-bearing
Treasury bills........... . # 15» 334,892,000
Certificates of indebtedness
24,500,>02,000
13.373, 508,400
Treasury notes...... .....
53,208,902,400
Bonds
Treasury............. .
118,563,915,150
Savings (current redaup. value) 52,008,036,135
Depositary............. .
320.422.000
Armed Forces Leave,..... .
838,037,025
Investment Seri es.........
969 960.000

172,700,370,310

Special Funds
Certifieates of indebtedness
14,811,100, 000
Tre asury notes...... ....
14,705,434.000
Total interest-bearing............ .
Matured, interest-ceased

29,516,534.000
255,425,806,710
240,758,325

.

Bearing no interest
War savings stamps.........
63,793,226
Excess profits tax refbnd bonds
12,660,000
Special notes of the United States:
Internat’ 1 Bank for ixeconst.
and Development series....
265,785,000
Internat*1 Monetary Fund Series 1,345,000,000
Total........ .............. . .TTITT.TT... .77
Guaranteed obligations (not held by Treasury)
Interest-bearing
Debentures: F.H.A. ........
32,951,386
Demand obligations C.C.C. ...
50, 520,802
Matured, interest-ceased. »«......

1,687,238,226
257,353.803.261

83,472,188
5,601,675
89,073,863

Grand total outstanding.
257.442.877.12Z.
L? ance lace amount of obligations issuable under above authority.... 17,557,122.876
Reconcilement with Statement of the Public Debt - November 30, 194?
L.
(Daily Statement of the United States Treasury, December 1, 1947)
standing —
I t w 1 *roSS P“!3110 debt............... • .......... 258,211,995,228
T>.fr?rvt'ee<* obligations not owned by the Treasury..... .
89,073.863
I
Total
1
,
ogross
- -w w ^
U U X J .1 , U
O U U CU1U.
u cu . c tu u e tiu
U
U X ig c U > J _ U J
public
debt
and gguaranteed
obligations................
258,301,069,091
I UQt - other outstanding public debt obligations
not subject to debt limitation,
858,191.967
257,¿¿2,877.12A
p -553

TREASURY DEPARTMENT
Washington

165
Press Service
Ho. S-554

FOR IMMEDIATE RELEASE
Friday, December 5, 1947>

George
SChoerieman, Commissioner of Internal Revenue> in
response to requests from many corporations which determine
their dividend policies at this time of year, today made the
following statement of administrative policy with regard to
Section 102 of the Internal Revenue Code:
!,The ordinary practice of profit-making corporations is to
retain, each year, whatever surplus is reasonably needed for
the business, distributing the remainder to stockholders in the form of dividends-. Such policies do not conflict with any pPbvi^
slon of the Internal Revenue Code and do not subject any Corpora­
tion to the additional tax provided by Section 102* The
applicability of Section 102 Is not based upon the retention of
any percentage of profits but rather upon the retention of,profits
In excess of the reasonable requirements of the particular
business. In view of some apparent misinformation and unjustified
apprehension as to the administration of Section 102, it may be .
helpful to state again what has been the•long-established policy
of the Bureau of Internal Revenue,
MSection 1 0 2 , or a substantially equivalent provision> has
been in the income tax law ever since the modern income tax was
adopted in 1913. It never has been and is not new the policy of
the Bureau of Internal Revenue to' apply this provision to any
corppration unless it withholds from its stockholders surplus
earnings clearly in excess of the reasonable needs of the business
and for the purpose of enabling stockholders to avoid personal
income taxes. In determining whether surplus is retained for
business purposes, It is our unvarying policy to give' due consid­
eration to the judgment of the corporation’s own management as
to what sums are needed for working Capital, expansion of
facilities, sinking funds for debt retirementcontigency funds
to cover employee benefits, and similar bona fide business and
legal needs. In all questionable cases, it is o.ur policy to give
the corporation’s management an opportunity to explain the purpose
of its surplus retention before .applying Section 102,. We believe
the administrative record of the past 35 years provides' ample
assurance that Section 102 has not been, and is not being, applied
$0 as to affect adversely the bona fide operation or conduct of
any business/
"To some extent, misunderstanding appears to have arisen
because the 1946 corporate tax return asked corporations to state
whether they had distributed at least 70 percent of their earnings
to stockholders. This question has been deleted for the 19^7
return. The Bureau of Internal Revenue used this 70 percent figure
only as a convenient method of selecting corporation income tax re­
turns for examination, but under no circumstances does it use this,
or any other percentage, as a measure for liability under Section
102.«

o0o

186
TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Tuesday, December 9. 1947.

Press Servlet
Ho! S- 5 5 5

The Secretary of the Treasury announced, last evening that
the tenders for $1 ,2 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 1 -day
Treasury bills to be dated December 1 1 , 19^7, and to mature
March 11, 1948, ‘
Which were offered December 57 1947» were opened
at the Federal Reserve Banks on December 8 *
opened
The details of this issue are as follows:
Total applied for - $1,616,937,000
Total accepted
- 1,201,938,000 (includes $42,769,000 entered
on a non-competitive basis and accepted in
full at the average price shown below)
Average price - 9 9 7 7 6 0 Ectiiv, rate of discount approx, 0.948$ per
ann urn
Range of accepted competitive bids:

(Excepting one tender of
$400,000)

High = 99.770 Equiv. rate of discount,approx. 0.910$ oer annum
Low - 9 9 . 7 5 9
"
”
"
"
v
0 *9 5 3 $ "
(21 percent of the amount bid for at the low price was accepted)

Federal Reserve
District

Total
Applied for

Total
Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis

$

$ ' 2 ,910,000

2 ,9 10,000

1^75,699,000

59.643.000
' 5 ,4 0 9 , 0 0 0
,
4 ,2 6 5 , 0 0 0
1 3 .2 1 8 . 0 0 0
8 .7 8 5 . 0 0 0
2 8 .3 3 1 . 0 0 0

1,086,789,000
8.703.000
2.673.000
4.569.000
1.505.000
35.138.000
5.409.000
4.028.000
13 108.000
8.775.000
28,331,000

$1,616,937,000

$1,201,938,000

8 .7 0 3 . 0 0 0
3 .7 0 0 . 0 0 0
4 .7 6 9 . 0 0 0
1 .5 0 5 . 0 0 0

Minneapolis

Kansas City
Dallas
San Francisco
TOTAL

0O0

.

167
TREASURY DEPARTMENT
Washington

FOR RELEASE, MORNING NEWSPAPERS
W e d n e s d a y , D e c e m b e r 10, 1947.

Press
No.

Service
S-556

George' J. S c h o e n e m a n , C o m m i s s i o n e r of I n t e r n a l R e v e n u e ,
a n n o u n c e d t o d a y rule.s f o r d e t e r m i n i n g h a d d e b t r e s e r v e s f o r
the c a l e n d a r y e a r 1 9 ^ 7 a n d s u b s e q u e n t t a x a b l e y e a r s i n the c as e
of b a n k s w h i c h u s e t he r e s e r v e s y s t e m o f c o m p u t i n g b a d d e b t s
deduc t i o n s for income tax p u r p o s e s .
U n d e r i n s t r u c t i o n s i s s u e d t o d a y to f i e l d o f f i c e s of the
B u r e a u of I n t e r n a l R e v e n u e , t h e s e b a n k s w i l l be p e r m i t t e d to
c o m p u t e t h e i r d e d u c t i o n s f o r b a d d e b t r e s e r v e s f or e a c h of
s u c h y e a r s o n the b a s i s o f the a v e r a g e l o s s e s of t w e n t y y e a r s ,
p r o v i d e d t h a t n o a d d i t i o n s to the r e s e r y e s m a y be m a d e t h a t
w i l l r e s u l t i n t h e t o t a l of s u c h r e s e r v e s e x c e e d i n g t h r e e t i m e s
a n a m o u n t c a l c u l a t e d b y m u l t i p l y i n g t h e o u s t a n d i n g l o a n s at
the e n d o f the t a x a b l e y e a r b y the a v e r a g e r a t i o o f b a d d e b t
l o s s e s to o u t s t a n d i n g l o a n s d u r i n g t he s a m e t w e n t y y e a r p e r i o d .
H e r e t o f o r e , t h e p r a c t i c e h a s b e e n to u s e a s h o r t e r p e r i o d o f
time, o f t e n f i v e y e a r s , i n c o m p u t i n g s u c h r e s e r v e s .
I n o r d e r to e n a b l e b a n k s to a d o p t t h i s s y s t e m f o r t he
c a l e n d a r y e a r 1 9 ^ 7 , C o m m i s s i o n e r S c h o e n e m a n also a n n o u n c e d that
the i n c o m e t a x r e g u l a t i o n s a r e b e i n g a m e n d e d to p e r m i t e l i g i b l e
b a n k s to c h o o s e t h i s p l a n f o r 19^7. if t h e y do so b y M a r c h 15,
19^8.
I f the b a n k f i l e s its a n n u a l i n c o m e t a x r e t u r n b y t h a t
dat e , it m a y p r e p a r e the r e t u r n o n t h e n e w b a s i s a n d a t t a c h
a n e x p l a n a t i o n o f its a c t i o n , w i t h o u t m a k i n g f o r m a l r e q u e s t f o r
p e r m i s s i o n to c h a n g e its a c c o u n t i n g m e t h o d s .
O t h e r w i s e , the
u s u a l r e q u e s t m u s t be m a d e b e f o r e c h a n g i n g a c c o u n t i n g m e t h o d s

0O0

TREASURY" DEPARTMENT
Washington

FOR IMMEDIATE RELEASE
December 10, 1947

Press Service
No. S-557

The Bureau of Customs announced today preliminary figures showing the
imports for oonsuirption of commodities within quota limitations provided
for under trade agreements , from the beginning of the quota periods to
November 29,. 1947, inclusive, as foil owes

*
i
Unit tImports as
Commodity
s
Established Quota ;
of
sof Nov. 29
________________ :______ Period and Quantity: Quantity :
194-7
Whole Milk, fresh
or sour
Cream, fresh or sour

Calendar year
Calendar year

3,00Q„000

Gallon

6,915

1,500,000

Gallon

1,652

Fish, fresh or frozen,
filleted, etc., cod,
haddock, hake, pollock,
cusk, and rosefish
Calendar year

23,906,423

Pound

White or Irish
potatoesj
Certified seed
Other

90,000,000
60,000,000

Pound
Pound

12 months from
Sept. 15, 1947

Cuban filler tobacco
unstemmed or stemmed
(other than
cigarette leaf
tobacco) and scrap
tobacco
Calendar year
Red cedar shingles

Calendar year

Molasses and sugar sirups
containing soluble nonsugar solids equal to
more than 6% of total
soluble solids
Calendar year

Pound
(unstemmed
equivalent)

Quota filled

27,365,680
27,201,010

Quota
Filled

22,000,000
1,380,300

,

1 500,000

Square

Gallon

Quota filled

580,550

TREASURY DEPARTMENT
Washington
FOR M

EDIATE RELEASE

Press Service

December 10, 1947

No- S~ 558

The Bureau of Customs announced today preliminary figures showing the
quantities of wheat and wheat flour entered, or withdrawn from warehouse, for
consumption under the import quotas established in the President’s proclamation
of May 28, 1941, as modified by the President’s proclamations of April 13, 1942,
and April 29, 1943, for the 12 months commencing May 29, 1947, as follows:

. ....... .. ■■ ■■■*'
Country
of
Origin

......
Wheat
Established :
Imports
Quota
:May 29, 1947, to
:Nov. 29 a 1947
(Bushels)
(Bushels)

795,000
Canada
China
Hungary
Hong Kong
Japan
100
United Kingdom
Australia
100
Germany
100
Syria
New Zealand
Chile
100
Netherlands
2,000
Argentina
100
Italy
Cuba
1,000
France
Greece
100
Mexico
Panama
Uruguay
Poland and Danzig
Sweden
Yugoslavia
Norway
Canary Islands
1,000
Rumania
100
Guatemala
100
Brazil
Union of Soviet
100
Socialist Republics
100
Belgium
800,000

112

Wheat flour, semolina,
crushed or cracked
wheat, and similar
wheat products
Established
:
Imports
Quota
:May 29, 1947* to
:Nov. 29, 1947
(pounds)
(Pounds)
815,000

2 4 ,0 0 0
13,000
13,000
8,000
75,000
1,000
5,000
5,000
1,000
1,000
1,000
14,000
2,000
12,000
1,0001,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000

-

1,107,892
6,000
*r
160
—
—
—
—
—
—
—
—
—
—
—

—

Ï12
*-o0o-*

.,000,000

1,114,052

170

TREASURE DEPARTMENT
Washington
FOR I M EDIATE RELEASE
Wednesday, December 10* 1947

Press Service
No0 S-559

The Bureau of Customs annouced today preliminary figures showing
the imports for consumption of commodities on which quotas were pre­
scribed by the Philippine Trade Act of 1946, from January 1, 1947, to
November 29, 1947, inclusive, as follows:

Products of : Established Quota
Philippine Islands:
Quantity

t
:

Unit of :
Imports as of
Quantity : November 29, 1947

%
Butt ons

850*000

Gross

Cigars

200,000,000

Number

Coconut Oil

44^,000,000

Pound

8 6 ,4 1 2
3,206,554
16,908,601

Cordage

6,000,000

u

2,211,227

Rice

1 ,0 4 0 ,0 0 0

it

50

Sugars, refined ) 1,904,000,000
unrefined)

ti

—

Tobacco

it

6,500,000

1,085,381

TREASURE DEPARTMENT
Washington

171

FOR IMMEDIATE RELEASE
Wednesday, December 10, 1947

Press Service
No* S-560

The Bureau of Customs announced today that preliminary data on imports of
cotton and cotton waste chargeable to the quotas established by the President’s
proclamation of September 5, 1939, as amended* for the period September 20*
1947, to November 29 * .1947* inclusive, are as follows:
COTTON (other than linters)
(In pounds)

Country of
Origin

Under 1-1/8" other
than rough or harsh
under 3 / 4 "
Imports Sept*
Established 20*1947, to
Nov* 29*1947
Quota

Egypt and the
An glo-Egyptian
783*816
Sudan.«•*«.••••*•*
Peru.
2 4 7 ,9 5 2
British India..... 2,003,483
C h i n a . ..........
1,370,791
Mexico
8,883*259
Brazil............
618,723
Union of Soviet
Socialist Repub­
lics,.,.. .... ,.»*
4 7 5 ,1 2 4
Argentina.... -.'*»*.*
5 ,2 0 3
Hei*tiv >
* *•# ••••
237
Ecuador*.•.«•*..... *
9,333
Honduras
752
Paraguay.-.
871
Colombia..........
124
Iraq,.............
195
British East
Africa. ...........
2 ,2 4 0
Netherlands East
Indies.,..........
71,338
—
Barbados,
Other British
West Indies 1 / ...
21*321
Nigeria..•*...,.
5,377
Other British
'“est Africa 2/ ...
16,004
Other French
Africa 2 / ........
689
Algeria and Tunisia
—

1 - 1/ 8 " or more
but less than
1- 11 / 1 6 " U
Imports Sept*
20,1947, to
Nov. 29,1947

Less than 3/4"
harsh or rough ^
Imports Sept. 20*
1947* to Nov. 29*
1947

43 , 574,472
1 8 6 ,9 6 2

6 *810*505

618,723

—
—

-

249,068
—
—
.-

177,949
—

—
—
-

8 ,8 8 3 ,2 5 9

14 , 516 ,8 8 2

.

^ •

_
-

-—

-

-

-

Tlir
•-

,

•mm

M*
—

—

—

9,938,012

45,656,420

6 *810*505

1 / Other than Barbados* Bermuda* Jam aica* Trinidad * add Tobago*
2/ Other than Gold Coast and N ig e ria .
3 / Other than A lg e ria , T u n is ia , and Madagascar*
4/ Established Quota - 45*656*420*
5/ Established Quota - 70*000*000*

-

1,903,999
-

—

172
- 2 ~
COTTON WASTES
(In pounds)

,

'COTTON CARD STRIPS made from cotton having a staple of less than 1— 3/16 inches
in length, COMBER WASTE, LAP WASTE, SLIVER WASTE, a ND ROVING WASTE, WHETHER
OR NOT MANUFACTURED OR OTHERWISE ADVANCED IN VALUE: Provided, however, that
not more than 33— 1/3 percent of the quotas shall be filled by cotton wastes
other than comber wastes made from cottons of 1-3/16 inches or more in staple
length in the case of the following countries: United Kingdom, France,
Netherlands, Switzerland, Belgium, Germany, and Italy:

Country of Origin

United Kingdom«......
Canada...... .
France.......... .....
British India........
Netherlands......... .
Switzerland..........
Belgium......... .
Japan......... .
China. ....... .
Egypt.............. .
Cuba.................
Germany.
Italy.... ...........
Totals

1/

: established
TOTAL QUOTA

Total imports
Sept# 20,1947,
to Nov* 29,1947

4 ,3 2 3 ,4 5 7

'Established I m p o l i ' Sept *2
33-1/3!? Of
1947, to
Tct al Quota ,1947 1/
1,441,152

239,690
227,420
69,627

60,534
—
69,627

6 8 ,2 4 0

75,807

—
„

22,747

—
—
—
_

44,388
38,559
341,535
17,322
8,135
6,544
76,329
21,263
5,482,50?

1 4 ,7 9 6
12,853

—
,

—
—
130,161

Included in total imports, column 2.

-oOo-

25,443
7,088

1 , 5 99,886

-

v

TREASUEÏ DEPARTMENT
Washington

FOR RELEASE MORNING NEWSPAPERS,
Monday, December 15« 19¿7.

Press Service
No# S— 561

The Treasury Department today made public a report showing
the results of a census of American-owned assets in foreign
countries, taken in 1943 by the Department’s office of Foreign
Funds Control*
In the foreword of the report, Secretary Snyder points out
that for the first time the real" size and scope of American-owned
assets in foreign countries is made available to the public* The
detailed data appended to the study, he continues, should prove
"invaluable to businessmen and students interested in the problems
of international trade and finance»"
The total of foreign assets owned in the United States as of
the census date - May 31* 1943 - was $13*542,000,000, the report
released today sets forth* Included were such assets as invest*-*
ments in Arnerican-contjolied enterprises, securities, bank deposits,
interests in estates and trusts, and numerous other types of property#
Investments in American-controlled foreign enterprises, engaged
in all major types of business and located in all parts of the world,
comprised more than half of the value of American-owned foreign
assets* Holdings of foreign securities accounted for another onefourth of the total; holdings of foreign dollar bonds amounted to
$1,564,000,000, and foreign stocks and other issues payable in
foreign currencies totaled $2,105,000,000* The latter figure
exceeded all previous estimates in both the volume and the number
of countries involved*
American interests in Canadian assets, which amounted to
$4 ,446 , 000 , 000 , were four times as much as those in any other
country, and the equivalent of the total in Europe, valued at
$4,418,000,000* Half of these European assets was about evenly
divided between Germany and the United Kingdom# Assets in Latin
America aggregated $3,535,000,000, and those in the rest of the
world, $1 ,142 , 000 ,000 *
As a result of extensive efforts to reach all United States
citizens and individuals who hold foreign assets, more than 220,000
business concerns and individuals filed reports with the Treasury
Department on Form TFR-500* Of the 168,000 individuals reporting,
27,000 were citizens of foreign countries, two-thirds of whom had
entered this country after 1937* Individuals owned $3,570,000,000
of the assets; approximately 12,000 corporations and other profit
organizations accounted for $8,866,000,000, while estates, trusts
and non-profit organizations owned $1,106,000,000*

174
-

2

~

The owhers of foreign assets, it was pointed out, were located
in every State in the United States, the District of Columbia,
Alaska, the Canal Zone, Hawaii, Puerto Rico, and the Virgin Islands,
In addition, close to 3,600 United States citizens in foreign
countries reported their holdings.
New York State led, with 58,605 owners, or 30 percent of the
total number, reporting assets aggregating $7,590,000,000, or 56
percent of the total amount. The report notes the tendency of
corporations with substantial interests in foreign trade and
investment to concentrate in New York.
Among the States, the smallest in number of reporters was
Nevada, and the smallest in value of assets was Wyoming. The
latter was followed closely by South Dakota, Mississippi, Idaho
and North Dakota, these states having foreign assets ranging in
value from $1,500,000 to $2,900,000« In contrast, between
$575,000,000 and $ 645 , 0 0 0 ,0 0 0 of foreign property was held by
owners located in each of the fdllowing states: Pennsylvania,
Massachusetts, California, New Jersey and Illinois«
An analysis of the creditor-debtor position of the United
States, 1939-1946, appears in chapter two of the report, indicating
that the United States was a net creditor to the amount of
$1,100,000,000 at the end of 1939* At the end of 1946 the United
States was a net creditor to the extent of $4,800,000,000, but-only
because o f the inclusion of obligations due to, and other foreign
assets of, the United States Government. Exclusive of these
Government loans and assets, this country was a net creditor by
about $ 240 ,0 0 0 ,0 0 0 at the end of 1946«
The "Census of American-Owned Assets in Foreign Countries",
based on reports on Treasury Form TFR— 500, is in booklet form, and
may be purchased from the Superintendent of Documents, Government
Printing Office. Its chapters set forth the background of the
census, a description of its nature and scope, and the salient
facts developed out of the census data* In its appendix are basic,
tables, presenting the available data in detail*
.An earlier study, "Census of Foreign-Owned Assets in the
United States," based on reports submitted on Form TFR-300 in
1941, was released to the public in February, 1946. The tYi/o
censuses were of great usefulness in connection with the freezing
controls administered by the Treasury during the war period, and
in Allied preparation for peace negotiations.

—o Oo—

TREASURY- DEPARTMENT
Washington
FOR RELEASE..,' MORNING NEWSPAPERS,
Friday, December 12-.^ 1947:»

:
■ "

Press Service
.■ No. 3-562

The Secretary of ■the Treasury, by this puhli-c'hotice, in­
vites tenders for $1 ,3 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 1 -day
Treasury bills, for cash and in exchange.for Treasury bills
maturing December 1 8 , 1947* to be issued on a discount"basis
under competitive and non-competitive bidding as hereinafter
provided. The bills of•this series vill.be dated December 18,
19^7,. and will mature March- 18, 1948, when the face amount will
be payable without interest. They will be issued in bearer
form only, and in denominations of $1 ,0 0 0 , $5 ,0 0 0 ,'$1 0 ,0 0 0 ,
$1 0 0 ,0 0 0 , $5 0 0 ,0 0 0 , and $1 ,0 0 0 , 0 0 0 (maturity value).
Tenders will be received at Federal Reserve Banks and
Branches up to the closing hour, two o'clock p.m., Eastern
Standard time, Monday, December 15, 1947. Tenders will not be
received at the Treasury Department, Washington. Each tender
must be for an even multiple of $1,000, and In the case of compe­
titive tenders the price offered must be expressed on the basis
of 1 0 0 , with not more than three decimals, e. g., 9 9 .9 2 5 .
Fractions may not be used. It is urged that tenders be made on
the printed forms and forwarded in the special envelopes which
will be supplied, by Federal Reserve Banks or Branches on ap­
plication therefor.
• Tenders will be received without deposit from incorporated
banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders .from others must be
accompanied by payment of 2 percent of the face amount of
Treasury bills applied for, unless the tenders are accompanied
by an express guaranty of payment by an incorporated bank or
trust.company.
Immediately after the closing hour, tenders will be opened
at the Federal Reserve Banks and Branches, following which
public announcement will be made by the Secretary cf the Treasury
of the amount and price range of accepted bids* Those submitting
tenders will be advised of the acceptance or rejection .thereof.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, In whole or in part, and
his action in any such respect shall be final. Subject to these
reservations, non-competitive tenders for $2 0 0 , 0 0 0 or less
without stated price from any one bidder will be accepted in full
avei>a&e price (in three decimals) of accepted competitive
bids, Settlement for accepted tenders In accordance with the
bids must be made or completed at the Federal Reserve Bank on
December 1 8 , 1947, in cash or other immediately available funds

2

or in a like face amount of Treasury bills maturing December 18,
1947. -Cash and exchange tenders will receive equal treatment;
Cash adjustments will be made for differences between the
par value of maturing bills accepted in exchange and the issue
price of the new bills .
The income derived from Treasury bills, whether interest
or gain from the sale or other disposition of the bills, shall
not have any exemption, as such, and loss from the sale or other
disposition of Treasury bills shall not have any special treat­
ment, as such, under the Internal Revenue Code, or laws amenda­
tory or supplementary thereto. The bills shall be subject to
estate, inheritance, gift or other excise taxes, whether
Federal or State, but shall be exempt from all taxation now or
hereafter imposed on the principal or interest thereof by any
State, or any of the possessions of the United States, or by
any local taxing authority. For purposes of taxation the amount
of discount at which Treasury bills are originally, sold by
the United States shall be considered to be' interest, Under
Sections 42 and 117 (a) (l) of the Internal Revenue Code, as
amended by Section 115 of the Revenue Act of 1941, the amount
of discount at which bills issued hereunder are sold shall
not be considered to accrue until such bills shall be sold,
redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets . Accordingly, the owner
of Treasury bills (other than life insurance companies) issued
hereunder need include in his income tax return only the
difference between the price paid for such bills, whether on
original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity
during the taxable year for which the return is made, as ordinary
gain or loss.
Treasury Department Circular No. 4l8, as amended, and this
notice, prescribe the terms of the Treasury bills and govern
the conditions of their issue. Copies of the circular may be
obtained from any Federal Reserve Bank or Branch.

0O0

17B

TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE
Thursday, December II, 19^7

Press Service
Wo. S- 5 6 3

On December 11th the Treasury received the. sum of
$260,852,24 from the Government of Finland, representing
a payment of principal in the amount of $9 6 ,0 0 0 , and the
semi-annual payment of interest in the amount of $1 3 0 ,0 2 5 , 0 0
under the Funding.Agreement of May 1, 1923; $13*695*06 on
account of the semi-annual payment on the annuity due under
the postponement agreement of May 1, 1941, and $21,132.18
on account of the semi-annual payment on the annuity due
binder the postponement agreement of October l4, 1943.
These payments represent the entire amount due from the
Government of Finland on December 15, 1947, under these
agreements.
0O0

177
TREASURY DEPARTMENT
Washington
FèR IMMEDIATE' RELEASE
Friday, December 12, 1 9 4 7

Press Service
Ho.' S-5&4

Secretary of the Treasury Snyder/ on behalf of the National
Advisory Council, today issued the following statement:
The United States Government welcomes the
statement of the International Monetary Fund respect­
ing measures to subsidize the production of gold.
- The expressed intention of the Fund to keep Under
review the gold policies of its members in the light
of a sound international gold policy is an important
forward step in the field of international financial
cooperation.
The United states, as the largest gold buying
country, has a peculiar and continuing interest in
the role which gold subsidies may come to play in
the production, movement, and price of gold. In particular, the United States would view with dis­
favor any tendency for countries to become dependent
on subsidized gold production as a solution to the
problem of arriving at and, maintaining equilibrium
in their balances of international payments.
In the view of the Council there are no grounds
.which would justify instituting a subsidy to encourage
the production of gold in this country. The present
monetary gold stocks of the United States ameunt to
no less than $22.7 billion. In the first 11 months
of 1947 gold purchases by the U. S. from foreign
countries amounted to $2,7 billion.
0O0

/

178

TREASUEf DEPa RTIIENT

Washington
C O R R E C T E D

C O P Y

FOR RELEASE HORNING NEWSPAPERS
Monday, December 1 5 , 1 9 4 ?

Press Service
No« 8 - 5 6 5 ( a )

D u r i n g t h e month o f November, 1 9 4 7 , m a r k e t
tran saction s

i n d i r e c t and g u a r a n t e e d s e c u r i t i e s

of

t h e Government f o r T r e a s u r y i n v e s t m e n t and o t h e r
accounts re s u lte d

in n et p u rch ases

S e c r e t a r y S n y d e r annou nc ed t o d a y

oOo

of $2 2 0 ,9 6 1 ,0 0 0 ,

179
TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE,
Monday, December 153 19^-7»

Press Service
No. S-566

Secretary Snyder today issued the following statement
Concerning devaluation of the Russian ruble:
I have seen no official report respecting
the currency conversion which, according to press
statements, is to be carried out in the U.S.S.R.
during the current week.
Currency conversions of a much milder sort
have been a part of post-war inflation control in
numerous countries, including several non-communist
countries of Western Europe. It Is interesting to
find that the U.S.S.R. is faced with the same problems
and must turn to a more severe form of the same device
in order to meet them.
These Western European conversions were aimed
solely at soaking up excess purchasing power at a
time of extreme shortage of goods , They were not
linked with action to devalue the currency by
changing the foreign exchange rate. So far as can
be determined by press reports, this is also true
of the projected conversion in Russia.
In fact, if a currency conversion is effective
in slowing down inflation, it may reduce pressures
leading to devaluation.

oOo

United States Savings Bonds Issued and Redeemed Through November 30, 194-7
(Dollar amounts in millions - rounded and will not necessarily add to totals)

' Amount
Amount
¡Amount Out- |Percent Redeemed
Issued 1/ Redeemed l/ standing 2/ of Amount Issued
T
■
Series A-D:
s
Series A -1935 (matured) ........
96.86%
$8
$247
$ 255
Series B-1936 (matured)
22
95.25
4-63
441
Series C-1937 ................. .
78,78
589
464
1 / 125
Series C-193S .................
667
510
157
23.54
Series D-1939 *......... .......
1,032
216
815
20.93
Series D-1940 .,...... .
1,217
233
19.15
983
Series D-1941 ............. «...
90
17.18
524434
TotaT Series A-D ........ ,,,,

4, 747
1,849
---T~"
'
Series E:
. ■
Series E-1941
___ _
1,471
341
Series E-1942 ..... ......... .
6,662
2,374
Series E-1943 . ......
4,596
10,909
Series E-1944 ..................
12,727
5 ,4 7 7
Series E -194-5 .»................
9,928
4 ,0 5 4
Series E-194-6....... ..........
4-,358
1,212
Series E-194-7 (11 months) ......
3,392
373

38.95
-H

1,130
4,288
6,312

23.18
35.63
42.13
43.03
40.83
27.81
11.00

7 ,2 5 0
5,873
3,146
3,018

Total Series E ..............

49,447

18,428

|

31,018

Total Series A-E ........... .

54,193

20,277

|

33,916

37.42

1,532
3,189
3,363

202

1 ,3 3 0

487

2 ?702

13,19
15,27
15.49
11.76
8.30
4.51
*73

Series F and G:
Series F and G - 1 9 4 1 ............
Series F and G-1942 ............
Series F and G-1943 ............
Series F and G-1944 ............
Series F and G-1945 .... .......
Series F and G-I 946 ,...........
Series F and G-1947 (11 months).
Total Series F and G
Unclassified sales and redemptions
Total All Series
1/

2,898
1

hj ..........

3 ,6 9 2
3 ,1 4 5

521

2,993
2,318

434
261
135
17

20,232

2 ,0 5 7

113

165

74,538

22,500

2 ,8 4 2
3,258
2,684
2,858
2,301
“ | ^1' .... . '"n
|

18,175

~ 1 .....
1

|

37,27

10.17

',,rn
-52

5 2 ,0 3 9

.
30.19

Includes accrued discount,

V Current redemption values,
1/ Includes matured bonds which have not been presented for payment,
k/ Includes SerjLeg A and B (matured), and therefore does not agree with totals
under interest-bearing debt on Public Debt Statement,
Office of Fiscal Assistant Secretary - Treasury Department,

TREASÜ K F. bÈ^AkrMENT

Washington

PDR' RELEASE MOHJnre NEWSPAPERS ’ '• '

Friday, December 19 v 19¿7

’

181
'Press Service
No. S - 567

The Treasury Department macie public today a staff study entitled
“Federal excise Taxes on Transportation,n analyzing- factual data believed
pertinent to the policy question of whether these taxes should be changed
or eliminated in the course of postwar tax revision..
Thè study presehts information as to the rates,• the revenue yields,
and the eCckó¿6•^ip^olJind•(pf, the industries affobted. by the transportation
excises, and discusses the effects of the taxes bn profits, on business
costs and competition, and on consumers. Administrative and technical
problems arising from the taxes also are considered*
Both, taxes had World War I histories, but were repealed as of . •
January 1, 1922. They were revived as World War II revenue measures,, the
tax on transportation of persons'in 1941 and that on transportation of
property in 1942. The levy on transportation of persons was fixed at 5
percent in 1941, increased to 10 percent in 1942, and increased again to
15 percent in 1943, there being certain exemptions# The rate on trans­
portation of property has been 3 percent ever since the revival of this
excise, with a special provision covering transportation of coal.
Revenue yields of t h e ’two excises have been similar in amounts. The
tax on transportation of^ pèrsons produced ^>244 ^ 000 , 0 0 0 ’revenue and that
on transportation of property $275*700,000 revenue in the Government’s
fiscal year 1947.

As to the tax on transportation of persons, the study says it is
doubtful whether the existence of this excise had. a. significant efiect on
profits of carriers during'the war period. .However, it. points out, the
abnormal wartime experience"with the -tax does.not provide a basis for
determining its effect on profits under peacetime conditions.
Prior to the war,' only about 15 percent of the intercity passenger
mileage was supplied by'public transportation facilities subject to tax,
the remaining B 5 percent representing travel by private automobile«.
Vtfhen the postwar automobile demand becomes satisfied, and other
factors affecting demand and supply in the transportation industry have
become adjusted to a peacetime basis, it is likely that the present tax
would have a significant effect on. profits. The increased cost of
travel due to the tax probably does hot greatly affect business and the
most urgent personal travel, but it may materially affect the volume of
pleasure travel due to possible substitution of the automobile for other
travel means.
9

,I,11 .

■if*

a *,

Coach travel on the railroads is particularly sensitive to changes
in passenger fares, so the prewar history of railroad rates indicates*
Because of large fixed costs, a small decrease in railroad passenger
« v e n u e can have an important effect on profits. Since railroads are
again showing deficits on.passenger operations, any reduction m tr f
resulting from the tax would add to their difficulties.
Bus travel m ay be somewhat less sensitive to increases in the cost
of transportation, and the possible continuation of an upward trend in
this- form of travel would tend to offset in part reduction m travel caused
by the tax* Similarly; the favorable prospects for .expansion of demand
for air travel would help to offset the effects of the.tax on volume of
air traffic and profits.

.

.

To the extent that there are differences in the use of taxable
transportation facilities by different types of business, the tax
discriminates against those types which make tne most use of these
facilities. The tax also tends to create competitive inequities among
the* tr m i s po rtati on agencies providing different types of
it increases price differentials and tends to produce a shift m travel
from the higher priced to the lower priced types.
- With reference to the effect of the tax on consumers,_the study
relates that the tax probably constitutes a higher proportion o income
for the lower than the higher income groups. The tax on transportation
expenditures made by business firms is likely to bo reflected in prices
p S d by consumers in the long .run, and thus be distributed rcgressivcly
in accordance with, consumer expenditures.

.

It is doubtful whether the tax on transportation of property has had
a significant effect on carrier profits up to now, according to the study,
since the transportation industries have operated at or near capacity
since the tax was imposed.. Under more n o m a l _ conditions the tax probably
would have some effect bn the volume of traffic and profits.
In view, however, of the probable unresponsiveness of the demand for
freight transportation to changes in the cost of such transportation, an
the relatively low rate of the p r o s i t tax, it is doubtful M o t h e r
continuation of the tax woudl affect profits of the carrier industry very
substantially•
The tax tends to increase business costs generally but not uniformly♦
Moreover, since it applies to shipments of raw materials as well as
finished goods, there i s •considerable opportunity for
*«Mbuti#«
tax as goods flow through the various stages of production and d i s t n

9

- 3 -

Although the rate is relatively low, a large volume of total freight
is in the form of raw materials where small differences in cost may
determine the source of supply to be used. Transportation costs in 1941
.amounted to more than half the value of the products at destination in
the case of such heavy commodities as gravel, sand and salt, some fresh
fruits and certain forest products.
The competitive effects of the tax vail he very uneven for business
because of the wide variations in the importance of transportation costs
by industries and in the location of different firms selling in a common
market.
If there is a significant difference in rates between carriers, the
tax will widen the difference in favor of the lower priced services,
Generally, water and railroad freight rates are lower than truck and
express rates.
The tax appears to have a very regressive effect on consumers.
Although the tax falls largely on business costs, business will endeavor
to- pass it on to consumers. The tax probably tends to increase the price
of goods more than services.
Because consumers in the lower.income groups
spend a higher proportion of their income for goods than for services,
the tax passed on to consumers is probably more regressive than total
consumer expenditures.
Statistical tables on passenger and freight traffic and carrier
operations accompany the study.

0O 0

9

■"

T E I ) S m -EXCISE T££ES OH JERAITSPGRTATIOH

Part- I

- ' Excise Tax on Transportation- of Persons.;

Part II

- 'Sxcise-Tax on Transportation-of Property

Division of Tax Research, Treasury Department
December 19^7

Federal Excise Taxes on Transportation

One of the important questions in tax revision concerns the-’
changes to "be ma,de in the extensive list of excise taxes.
This
study is one of a series on the commodities and services subject
to excise tax. The purpose of:,.the ..'Studios? is tomakq., available
data on tax rates, revenue and the economic background of the
industry and to discuss the effec.ts of“..the tax. on profits, on
business costs and competition and on consumer's. The administra­
tion of the tax and the principal technical problems that arise
are also considered. The studios are not intended to make policy
recommendations but to provide information and analyses which
would be useful in appraising the desirability of changing or
eliminating the taxes involved.
The study was initially prepared in the Excise Tax Section
of the Division of Tax Research.
In its preparation valuable
a.ssistance and suggestions were received from other members of
•the Treasury tax staff, including consultation with members of
the Office of Tax Legislative Counsol on legal matters and of the
Bureau of Internal Revenue on a.dministrative matters.
The general aspects of excise taxes were considered by a
committee composed of the technical tax staffs of the Treasury
Department and the Joint Committee on Internal Revenue Taxation.
The detailed analyst® of the individual taxes, however, ha,s been
prepared independently and reflects only the views of the
Treasury tax staff.

Division of Tax Research
U. S. Treasury Department

December 19^7

184

FEDERAL & Ô Î S E TAXÉS DÎT" TRANSPORTATION

TABLE ÖE" CONTENTS
PART I

-

Excisé TaaTôàt T'iiaa's|)ôri;âtâ:;
ôn:' of Persons

Page No.
I.

Description.o f .t h e .tax- .*, *

II.

Changes in. thé: tax .since 191*4 f. Y..»‘Y

III.

Revenue .collections, .19*42-19*47 • * • ••• •... V .

IV.

»*; ;

.

1

..., .,....

2

...

Ij.

Economic background of- the" industry .■.k ./
.
.
A. Character of supply ....
1 .V . .. Y Y . Y .. . .

L
1+

B.

; .Bates'. . .■

..•........___. ___ _.Y . f :Y . Y Y . .Y v .

10

C . Character of demand ....«......................
D. Outlook for the. industry' .. .. ..
..,..

1*4
i5

V.

Effects of the tax ............................... .
20
A. On profits:
.. 1 . . . . . . . . . . 2 0
B. On Business costs and compétition V ..:
..... ;....
22
C ♦J •Qni consumers
Y .'..
23

VI.

Administration and compliance ..................... . .

VII, Technical problems.*..... ...... . <i.. i.v
.
A. Treatment of foreign travel ............ .
B. The exenption of non-scheduled air flights
PART II

.

2*4
2 b

2*4

25

- Excise Tax on Transportation of Property

27

I. -

Description of the fax, . . . . . . .v .y YYy ...............

27

II.

Changes in the tax. since 1917

.1......... *............

27

III.

Revenue collections,■ 19*43“19*-47 •* * •• •*• • •& •. ’
. ........;

2S

IV. . Economic.Background of the industryA.
-B.
C.
D.

V.

VI.
VII.

.........
Character of supply ............................
Rates-and costs
C............ .............
Character of demand .. ...i.....................
Outlook for the industry'...... .

i

Effects of thc'.-taX .
f.-.
*..........-. ,..
A. On profits of the transportation i n d u s t r y ....
B. On business costs and competition .............
1 ,- Business'costs .............................
a. ’ Effects.-bn cost structure of economy ..
b. Competition among different users ....
2. Competition in the transportation industry.
C . Effect onxconsumers ii......... ......,,........
,Admini stration.a n d .compliance ... -..Y . *.....
Technical problems

.. *........

2S
29

3*+
35
35
35
3S
32
3S
3S

*42
*42
b3
bl

.M
/ ‘

'• -"r '?•:••.

op

.c o p e r s

''

TABLES
Page Wo.

PART I - Excise Tax on Transportation of Persons

1

Intercity passenger miles‘traveled in 19% , and
19U5.—
................—
..........................

2

Ratio of operating revenues to investnent in property
and equipment, common carriers of freight and
passengers, 1 9 % v ........ V ...........................

3 ‘

Railroad and Pullman: po.ssenger-train cars in
service, new cars installed, passenger miles, and
passenger, miles, per passenger-car mile, 1920 - 1 9 %

%

5

.* 7

•

9

Number of buses of intercity type produced,

193U - I9U6 ........... ..................................... .............v 11

5

. Scheduled domestic and international airlines:
number of planes, average seating capacity,
passenger miles and available seat miles, fiscal
years, 1937 - 19% .... 12

6'
’ "

Collections from tax on transportation of persons,
monthly, 1 9 % - 1 9 % ..... ...... ............... ......

17

7

'Consumer expenditures for intercity travel as a
percentage of disposable income, 1929 - 19^-6 *......

IS

Selected income data on intercity passenger trans­
portation by railroads, buses and airlines, 193 5 - 1 9 %

21

8

PART II- Excise Tax on Transportation of Property
1
•

■

2

'3
■
h-

5

Estimated volume, o f .intercity traffic of freight,
public and private, by kinds of transportation,
1937 - 19U5
. . . . . . . . . . ................. ......

30

Railroads: .Number of freight-carrying cars owned or
leased, average capacity, new' ca.rs installed, revenue
ton-miles and ton-miles per car-mile, 1921 - 1 9 % •••

32

Railroad freight revenues and revenue ton-miles of
freight carried, by months, 19 % - 19 % ........ ..

36

Selected income data on transportation of property by.
railroads, motor and water carriers, 1937 - 1 9 % *•••

37

Freight revenue and tax on transportation of property
in relation to value at destination for selected
commodities in railroad car lots, oh the b a d s of .
freight revenue s and values in 1 9 % .................

%

FEDERAL ESC ISS TAXES OS TEAKSPOKTAT ION
;v;•

-,

PART I

I.

.Wr* ;

-H-

Excise Tax on Transportation of Persons

Description of the tax,...

‘." .

;

The tax app lio s,, to the amounts paid within the United
States for transportation of persons by rail, motor vehicle,
waiter or air, ,and to the.amounts .paid for sleeping and
seating accommodations in connect ion "with, such transport action,
Tho tax is payable by the person making, the payment
subject to the tax and is collected by the person receiving
the payment. _ .
,
■
. *
^
. ..

. ■i<
.The.principal exemptions are*.

1 ..

Transportation, any part of which is
outside the northern portion of. the
Western Hemisphere,'l/ except 'that ■ •
part of such transportation which is\ •.
within, the United States, Canada or"
j^exico, or. between such countries."
.*.

.

g.

Transportât!on for which the fare does •
not exceed 35 cents»
"

3 » Commutation or season tickets for
single trips of less than 30 miles, or
commutation tickets for one month or
less.
Î+.

Transportation by motor vehicles having
a passenger capacity of less than 10
passengers, including the driver, when
not operated on an established line.

l/ The northern portion of the Western Hemisphere :me ans the
área lying west of the thirtieth meridian west of
•'Gxeehwich.,- east'bf-thé International'Date Diñe,- and
north of the Equatorr'buV' not •
"
•iftcluddtigrfcny. country of
South America..

.
*- 2 -

5 . Amounts paid by State and local govern­
ments, the Red Cross and other inter­
national organisations.

6.

Tran spot tat5. on under special tariffs
providing for fares of not more than
1-l/U cents per mile, applicable to
round trip tickets sold to members of
the United States armed forces, or
members of the armed forces of any of
the other United Hations, or author­
ized cadets and midshipmen traveling
at their own expense on official
leave, l/

7 . Amounts paid by the United States
Government for transportation of
persons furnished upon a United States
Government travel request. 2/
II.

Changes in the tax since 19

The act Of October 22, 19,1*4 levied a stamp tax on the
sale of seats or berths in parlor and sleeping cars; A tax
on the amount paid for transportation of persons and sleeping
and seating acco mnodations was imposed by the Revenue Act of
1 9 1 7 , The changes in tax rates since
arc shown below?

1/
2/
~

Rot applicable to amounts paid after December 3*i 19^7
(Public D a w 38*4-,.80th Cong.).
Exempted by order of the Secretary pursuant to authority
of Section 307(c) of the Revenue Act of 19^3* as amended.
Redoral Register, Volume 12, p . ^139•

-

3-

Changes in tax rates since I 9 1 H

t $ >- ...

Revenue Act

..-r

*

•*,

M.

•

19lk

Oct.

1916....

Sept * 9

1917

Oct. 3

191s

Eeb. 2 k

1921
iSki

19'43

Oct.
i>\
o-j
■m l

19U 2

•Jan.

Apr.

22

li

. •'

0

Effective date

[

.

-Rate
stamp tax on seats or berths
in parlor cars, sleeping cars, etc.
Repealed
S$ of charge for transportation a/
of charge for seats and berths

10$

S$ of charge for transportation,
seats and berths a/

1922

10

Repealed

5/0

of charge for transportation,
seats and berths b /

1

10$

of charge c/

1 , I9UU

15/o

of charge d/

a/ Ho tax imposed on amounts paid for: commutation tickets for trips
less than 3^ miles, or transportation the fare for which does not
exceed 35 f under the Revenue Act of 1917 and k2<j under the Revenue
Act. of 191S,
• ... .
. ..
h/' Ho tax. imposed-on amounts paid for:, transportation for which the
charge does not. exceed 35^5 commutation or season tickets for
.single-.trips of .less, than 3P;®iles; commutation tickets for one
month or less; payments for round-trip tickets at tariffs of not
more than, 1-^l/Hp. per mile iby members of the armed forces of the
United States in uniform, and. traveling at their own expense when
on. official leave. ...
» ! • .
• .
.. *Ig
c/ Exemption for special-rate furlough tickets.extended to members of
the armed, forces of any of. tha,United Hati ons.
d/ Section 8! of the Excise Tax Act.of 19^7» effective.April 1, 19^-7»
provided generally for exemption of travel outside the northern
portion of the-Western Hemisphere,-.. ....
•.. ..,
.,

Ill. Revenue collections, 19^2-19^-7'

1

"■•■u

The yield from this tax is approximately the same as from the
3-percent tax on transportation of property. Annual collections
are shown below:
r.’
fjv’Ry' .* * •
Collections,' fiscal years 19^-2-19^7

*

d In millions)•
*
7 - ’■’-Pi seal year

\

Collections

19^2

$

19 U3
19 UU

IV.

. . ,

21.U
87.1

■

'

•' • 153.7

19^5

2 3 ^ .2

19 U 6

226.7

19 U 7 ■

2 kk,0

■“

Economic “background-of the industry
A.

Character of ;supply •

,
-

Most of the taxable ‘transportati on service provided by rail,
W s , air and water carriers■consists of domestic -intercity travel.
'However, prior to the war only.:about 15 percent, of the intercity
passenger miles was-- supplied hy public, transportation ¡facilities
;sub ject to •tax.' '(Table l) The remaining 85 percent represented
travel hy private automobile* Of. the •total intercity travel h y
public transportation in 19 ^-1 , railroads accountedfor- 6ty. percent,
intercity buses for 29 percent, inland' waterways for U- percent,
and airplanes for 3 percent. During-, the war passongpr-car travel
declined and travel by public carriers expanded. ..The largest inincrease occurred in railroad travel,.
. . . .. .
International transportation service is provided by steam­
ship and airplane, but is relatively small compared with domestic
intercity travel.

- 5 -

Table 1

Intercity passenger miles traveled in 19^1, 1 9 ^ ,

Passenger miles
(in billions) .

Type of service

;
Vjsl

ro

Private automobiles

CF\
■?
4

19b-!

i$H%

I5 I.3

;

and 19^5

Percent of total

19^5.

19^1

*

iSkb

SU.8

5 ^ .0

3 8 .8

3 ^ .9

30.6

3 0 .6

97.7

93.8

9.«

Intercity buses

13 c 6

26„5

2 6 .8

Kb.

9*5

8 .8
1 .1

Airplanes

i.k

2.3

3*5

.ij.

.8

Inland waterways

1 .8

2 ,2

2 .1

.6

.8

306.O

1 0 0 .0

1 0 0 .0

3 1 IJ

280.0

1945

179.8

Railroads

Total

;

*7
1 0 0 .0

Treasury Department, Division of Tax Re search
Source:

Interstate Commerce Commission , Annual Report.

i 9*+3. 191*6.

The passenger transportation industries are generally charac­
terized hy large fixed capital investment. Operations must
usually he authorized hv a governmental agency having .jurisdiction
and the rates of service are subject to regulation under the
general principle of providing a fair return on the investment.
The investment required by carriers varies widely with the type of
service. Railroads require the largest investment in relation to
volume of business since they must provide and maintain the roadway
over which they operate and other expensive facilities. 1/ In I9 U 5
total railroad investment in property and equipment was more than
twice as large as .operating- .-revenue's from freight and passenger
service*
(Table 2) Buses operate over the public highways; airway
services are provided by the Pederal Government while airports are
generally municipally .owned; Governmental agencies also maintain
certain facilities for. water ^carriers. ;Because of those basic
factors there may be substantial differences in the flexibility of
supply of the•different services- Bus and air lines usually can
begin or discontinue -operations more, readily than railroads.
Transportation fanilities*,especially in the case of railroads,
cannot readily be shifted to other uses. There is, however, con­
siderable flexibility in the 'amount and kind of transportation service
made available to the public under different conditions of demand.
During the war, for example," -the railroads handled an unprecedented
volume of traffic without increasing passenger train equipment. 2 /
There is competition both within and between the various types
of taxed services. Each type of service has some distinctive
advantages which affect its competitive position. Bus transportation
offers the lowest priced, service but ordinarily consumes more travel
time. Railroad coach travel costs more but is usually faster than
bus travel. Coach, travel is competitive both with bus and Pullman
travel. Pullman and air travel are also"highly competitive.
The :
advantage of air speed is more marked on the longer trips. Travelers

l/

£/

Joint costs arc an important factor in the railroad industry,
since such facilities as roadways, terminals, and shops are
used for both passenger and, freight service. An important
part of costs would not be reduced appreciably by reduction in
passenger travel, Preight revenues normally constitute more
than SO percent of total revenues of railroads. Passenger buses
and airlines carry little freight.
Interstate Commerce Commission, Statistics of Railways in the
United Sta.tes.

'tJcT-

Table 2

Ratio of operating revenues to investment in property and
equipment, conmon carriers of freight .and passengers, I9 H 5

Carrier

1/

• Investment in
: property and
equipment 2/
Dec# 31, 19^5

:
:
:
:

Operating. 't
41
revenues
«

Ratio of
operating
revenues to
investment

t; (In millions)Railroads
Water carrier's
Motor carriers,
passenger only
Airlines;

'

$ 19,905.0

$ g,902.2

S7.9

133.3

1.5

72,u

.377.9

5.2

3U3.0

2,0

171.3 y

m

Treasury Department, Division of Tax Research
■Source:
•' .

|/

3/

5/

Railroads and wator carriers, Interstate Commerce
'Commission, Statistics of Railways in, the United
. States, 19^5; motor carriers, unpublished data of
Interstate Coamerce Commission; airlines, Annual
Report of the Civil Aeronautics Board, 19

Covers Class I lino-haul railroads; Class A and B water
carriers; Class I intercity bus lines;, domestic and
in te rnational ai rline s .
Represents not investment, after deduction for accrued
depreciation and amortization, Railroad investment
includes leased property a n d ‘property of wholly-owned
non-operating companies.
As of .Juno 30, 19 ^ 6 .
Pi seal yokr ending Juno 3 0 , 19^6.

- s usually have the choice of using different types of service on
longer trips and may aAso choose among two or more carriers furnish­
ing the same type of service.
In other cases a single carrier may
have the exclusive right of providing service .between certain points.

^

In'the inter-war period the passenger business of thè railroads
as a whole became unprofitable. As traffic was lost to other forms
of public transportation and to the private automobile, schedules
were curtailed and equipment vfai reduced. 'The numbor of passenger
train cars available declined"’sharply from 1927 bo 19^-1. (Table 3)
Between 1932 and 19Hi only about 2,230 now cays were purchased by
the Class I line-haul railways compar od with 38,000 in service
December 31» 19^1* The curtailment of service and deterioration in
equipment, in turn, resulted in further looses of potential traffic.
There was a substantial decline in passenger miles prior to the
depression years. As bus travel grew, the railroads in some cases
acquired or developed bus lines to replace or supplement their own
passenger service. However, this did not meet the problem created
by loss of rail travel* At the outbreak of the war. the capacity of
available'’-passenger equipment was greatly in excess of demand and
enabled the railroads to carry a Vastly expanded volume of traffic
during the war* Without substantial change in equipment, revenue
passenger miles increased from 21*7 billion in 1938 to 95*7 billion
in 19Ì&. (Table 3 ) In 19UU the average load per car was more than
2*5 time's as high as in 1938 and twice as high as in 1 9 2 1 , when
railroad passenger operations were still profitable.
The number of
ce.r miles operated in I9 .UU was more than $0 percent abové 1938. l/
Some improvements have been made in train.speeds and services, new
equipment has been added and other eciuipmcnt has been rebuilt and
modernized. However, the cars were mainly acquired many'years ago
and there has been no substantial change in terminal Or connection
facilities for some timo/. Some increase in traffic appears to have
been stimulated by rate reductions in the 1 9 3 0 ,s f. but aside from this
development'the industry apparently did not succeed in improving its
competitive position, • •
VWhile railroad passenger travel declined, intercity bus travel
expanded into a substantial industry* There is insufficient in­
formation to indicate in deta.il its growth and development, but the
data available show that expansion continued well into the 19301s .
It not
only replaced railroad travel in certain areas but

l/

Statistics of Railways in the United States, 19^5» P* 52»

Table 3
Railroad and Pullman: passenger-train cars in service,
new. cars installed,, passenger miles, and-passenger miles
• per passenger-car mile, 1920 - 192+5

Year

:
I
:
*

Rumber of
passenger-train cars
in service 1 /!
Total

: 1Hew cars : Revenue
■: installed;- passenger
1 / ' ; miles 4/
.]•Pullman *. Other 2/
(billions)

1920

if

1925

6 5 ,5 6 0

8,746

, .5 6 ,612+

63.2 3 9

9,451.
9 »780
9,2+62

53.S3S.
53,584
52,096
5 0 ,5 9 s

1929
193°
1931
1932
1933
193^* *•
1935
1936

1937
193 g
1939
192+0
192+1
192+2
19^3
192+2+

192+5

6 3 ,3 6 k

;■ 3 /

6 1 ,55 s
5 9 ,8 5 6
5 6 ,1 3 4
5 3 .3 3 6

. . 9 ,2 5 8

5 0 ,4 3 3
2+9 ,3 6 6
2+6 ,7 0 6
4 7 ,5 0 9
2+6 ,0 2 9

,7.99S
, 7,757
7 ,57 s

2+5,216

4 5 ,3 9 3
2+5 ,5 6 0
46,155

2+6 ,9 6 6
4 7 ,2 2 3

;

5 6 ,1 0 2

' 4 7 ,6 7 7
8 ,4 5 7
8 ,4 5 2 /../ m . m :

6 ,0 0 7 .

5/

ii
5S
' 7
27 b ;

> 2 ,2+26

7 ,0 5 2
6 ,9 1 0

576
275

; 38,977
36,306

209
152+

7,059

3 6 ,332+

7 ,1 3 4

36,2+2+6
3S,33i
3S,217

: 297
273
6
102+
111

3 8 ,6 3 3

159

.
:

:

5/

. 3 6 -2

15

.31*2

13

2 6 .9
2 1 .9

11
10
10
10
11

.17.0
1 6 .2+
.; 16.1

225.

4 1 ,3 9 0
2+0 ,92+9
3 9 ,9 3 1

7,824
8,751
8,590

> 7 .2+

1/

.

;Passenger
:miles per
:passenger
: car mile

16.5
22.5
22+. 7
21.7
22.7

■

11

13
13
12

2 3 .6

13
13

. 29>
53J
S 7 .9
95.7
91,6

15
22
31
32
30

Treasury Department, D iv isio n o f Tax-Research
Source: I n t e r s t a t e Commerce Commission, S t a t i s t i c s o f Railw ays in the
U nited S t a t e s .
1 / As o f December 31•
2 / In clu d es baggage c a r s , p o s ta l ca rs and p a r lo r and sle ep in g c a rs owned
by the r a ilr o a d s .
¿ / C lass I lin e -h a u l r a ilr o a d s o n ly ; exclu des c a r s o w ed and op erated by
the Pullman Company,
h/ In clu d es commutation.
5 / Rot a v a ila b le .

c_10 -

a ls o provided s e r v ic e in o th e r a re a s n o t p re v io u sly served "by r a i l ­
roads..; As in d ic a te d above, "bus l i n e s have more f l e x i b i l i t y in the
development o f ro u te s than th e r a ilr o a d s and‘have been, a b le to
expand in the d ir e c t io n o f in c r e a s in g t r a f f i c - p o t e n t i a l s . Growth
in the volume of b u sin e ss and the c o n s o lid a tio n o f o p era tio n s have
p e rm itte d improvement in f a c i l i t i e s . Although such d a ta as s e a tin g
c a p a c ity .a n d lo ad f a c t o r s a te n o t reported» i t i s known th a t b e fo re
' the: war -buses, had in c r e a s e d in -siz e and- improved s u b s ta n tia lly in
"speed and com fort. 1 / P rod u ction o f b u se s o f the. i n t e r c i t y ; type
'ampirit.ed, to approxim ately 1 1 ,5 0 0 (T a b le b) in th e 5 y e a rs 193^.-19^0
compared w ith l S , 000 2 / . re p o rted in o p era tio n at' the end o f 19 ^ 0 .
A b ilit y o f the bus. in d u stry to compete has been based la r g e ly on
ch arg in g r a t e s g e n e r a lly below the. l e v e l o f r a ilr o a d fa r o s and
continu ed improvements in s e r v ic e and equipment. A pparently bus
f a c i l i t i e s were more f u l l y u t i l i z e d th a n , r a i l road passen g er equip­
ment a t the outbreak of the war. Prom 19 bQ to 19 bb the number o f
bus p assen g er m iles in c re a s e d by only 97 p e rce n t compared w ith 206
p e rce n t f o r r a ilr o a d s , and during t h i s p e rio d th e number o f i n t e r ­
c i t y bu ses in o p era tio n expanded by 56 p e r c e n t.
Because of the more r e c e n t development o f a i r tr a v e l the equip­
ment o f a i r l i n e s i s more modern than th a t o f competing s e r v ic e s .
The ra p id expansion in o p era tio n s from about 1937 r e f l e c t e d p r i n c i ­
p a lly .in c r e a s e s in the s iz e o f p la n es and in scheduled f l i g h t s .
A v a ila b le sp at m ile s t r ip le d between 1937 and 1 9 b l,. w hile th e number
o f p la n es in o p era tio n in c re a s e d by only 17 p e rce n t * (T a b le 5) Tho
in c re a s e d wartime t r a f f i c was handled, la r g e ly by incroa.se s in the
av erag e-load * The number o f p la n es in the y ea rs 19b2-b3 was sub­
s t a n t i a l l y below th e 19 U1 l e v e l ; tho r a tio , o f revenue p assen g er m iles
to a v a ila b le s e a t m ile s ro se from 57 p e rce n t to S3 p e r c e n t. Wartime
developments in a v ia tio n have, 'given f u r th e r impetus to te c h n o lo g ic a l
improvements, which strengthen,¡.the co m p etitiv e p o s it io n o f th e
in d u s try .
,''r v . ■
3-

B.

Bates

, ■

-l- ' .

•

P r io r to the war th ere wa„s a downward trend in r a te s f o r a l l
forms o f passen g er tr a n s p o r ta tio n . B asic- r a ilr o a d coach f a r e s which
were 3 ,6 ce n t? p e r m ile in 1920 , were reduced in 1933 to 1 *5 ce n ts

l/
i

S e a tin g c a p a c ity of buses on th e G-reyhound lin o s in c re a s e d from
29 to b l between 1929 and 1939 ( '^Greyhound: S t i l l Growing1'
Fortune.-, Bee., 1 9 b b ).
.

2/

Statistical Abstract of thOiJnited States,» 19b l •

190
-11 -

lia b le k

lumber o f buses o f i n t e r c i t y type p r o c e e d , :193^ - 1 9 ^

Year

dumber

193^

1^03

1935
.1936 .

1.939

2 ,2 5 5
2 ,6 1 0
2,1130
2 ,1 6 7
2 ,*+15

I9 U 0 .
19Ul

2,001
2,080

19^2

3,968
1,691
1,927
3.50S
3,335

1937
1938

19^3,

19U5 .
19 H 6 .

Treasu ry Department., D iv isio n ©f Tax R esearch
So u rceî

Automobile M anufacturers A s s o c ia tio n ,
Automobile P a c ts 'and' F ig u re s ,' 1$U£ and 19^7•

-

12

-

Table 5
Scheduled dom estic and in te r n a tio n a l a i r l i n e s : number o f p la n e s ,
average s e a tin g c a p a c ity , p assen g er m iles and a v a ila b le s e a t
m ile s , f i s c a l drears, 1937 - 19^6

Fiscal
year

; ITumber : Average
seating
•of planes
capacity
: as of
:
:Dec. 31 l/:
2/

Revenue
passenger
miles

• Revenue
Available : passenger
tmiles, percent
seat
: of available
miles
* seat miles

(In millions)
1937
193S
1939

1+57.8

366
31+5

1/
13.91

U97.U

339

SU9.I

53.9

1 ,0 2 1 .U
1 ,1 7 0 .1+
1 ,6 1 9 .6

US.7

19^0
I9 U 1

bbo

lb. 66
1 6 .5 b

6 2 1 .2
9 U 6 .C

1+53

X7-5^

1,313-0

2,315.3

5 6 .7

19^2

25b

17.92

1 ,7 2 0 .0

273

6U .7
Si. 6
SS.l
S7 .2

1

1/

,6S2.9
2 ,1 0 2 .7
3,087-9
5,230.3

2 ,6 5 6 .S
2 ,0 6 l .9 .

35S

1 S.3 U
1 9 .0 5
1 9 .6 S

19^3
19 UU
19 U 5
19 U 6

5 IS
/

i

2,3S7.S
3 ,51+0 ,3
6 ,1 7 1 .2

53.1
5 8 .5

su.s

Treasury Department, D iv isio n o f Tax R esearch
Source:

l/
2j
3/

U. S. Department o f Commerce, Bureau o f the Census, S t a t i s t i c a l
A b stra ct o f the U n ited S t a te s and C iv il A ero n au tics Board,
S ta b is tie s of A ir lin e s .

In o p era tio n and r e s e r v e .
Domestic a i r c a r r i e r s o n ly .
ITot a v a ila b le .

-

13

-

191

on southern railroads and 2.0 cents on western railroads, and in 1936 to
2.0 cents on the eastern roads, l/ Certain increases made after 193&
were withdrawn or revoked prior to 19^2.
In 19^+2 the Interstate Commerce
Commission granted the railroads a temporary increase of 10 percent, which
was made permanent on December 6, 19^-6. A further increase averaging 10
percent was authorized on eastern roads June 1, 19^7* ¿7 On July 1, 19^+7
certain fare increases were made on western roads within the ceilings
previously set by. the Commission, and on December 8, 19^-7 the ceiling on
first, class fares was increased from 3*3 cents to 3*5 cents per mile.
An increase averaging 13 percent on coach fares and 6 percent on certain
first class traffic was authorized on southern roads October 8, 19^7*
Bus rates tend to follow the changes in coach fares being generally about
10 percent lower, but the relationship varies depending upon th;e region
and local conditions. Domestic airline rates were- reduced from 5*7 •
cents a mile, in 1939- to about U .5 cents in August 19^5*
In April 191*7
ratés were increased to. approximately 5 cents per mile, and further in­
creases approximating 10 percent have been proposed by most companies.- 3/
The average passenger revenue on international air carriers was 8 .7 cents
per mile in 19^6., approximately the same as in I9 U0 . Effective October 1,
19^+7 charges for sleeping space on railroads were increased on some trips,
the increases ranging up to U9 percent.
The regulation of rates and services in these industries has an
important bearing on the adjustment that may be made in response to any
reduction; in travel caused by the tax. Adjustments in' rates, in contrast
to price changes in nonregulated. industries, depend to a substantial
extent on the action of the regulatory bodies. Generally, regulatory
bodies have the power of approving or disapproving proposed changes in
rates or can initiate a-change. ;When the reduction in passenger fares'
on southern and western railroads produced increased.net revenue, the. ;
Interstate Commerce-Commission required eastern roads to lower their-: .
fares in 19 3 6 » In 19^-0 the Commission revoked an increase granted to
eastern lines in 193 ^ on the grounds that the 193 $ increase résultedùn
decreased net revenue.
In 19^-2 the Commission took the position that
increased fares would result in greater net revenue because automobile
travel was being sharply curtailed. Apparently Federal regulation of
passenger bus transportation is not as complete.as railroad' regulation.
In the absence •of protests, .ratés may be changed by the operating '
companies without ..approval of the Commission and competing lines aré
allowed to charge-different rates between the same points.
The compe­
tition among the various services is an important factor in the setting
of rates.
In the case of airlines, Government payments for carrying
mail enter into the considerations involved in setting the charges for
passenger service»
1/ Rates are fixed by classes .of service1. These figures represent
approximations .of one-way fare' rates as :given in rate discussions.
See 237 Interstate Commerce Commission 271*
2/ On December 8, I9 H 7 , the New Haven Railroad'-was granted'au additional
15 percent increase on coa.ch fares. '• ’
■
"
3J Some of the. companies have published increased rates which, in the
absence of disapproval by the Civil Aeronautics Board, become effective
December 12. Others have sought permission to make increases effective
on the same date. One company was granted an increase October 2^, 19^7*

C.

Character-of demand

,

,v '•.

-

.

■ The derxind for transportation is composed of bu sine ss -peejui-rer
merit s*?urgent personal needs and optional personal travel.. ..Info.r-. .
tìat'i-on on the extent of business travel is lini ted; l/ It appears ,
that it represents a substantial proportion of total travel and a
higher proportion of Pullnan and possibly airiino travel than coach
v. and bus travel. Where travel expense; is -a small' factor in -the total
.costs of a business, the amount of travel is not likely to be .
nifectéd substantially by a change in the charge for the service.
7 The'demand for personal travel will tend to vary with the urgency of
'.the nèed. - .Because of the large element of pleasure travel, however»
aggregate persona,! travel would tend to be more sensitive to price
changes than business travel. The possible substitution of travel
b y automobile is a factor in the demand for the various forms of
public transportation.
?■’ .
There-, is-more, evidence on the effect of price changes on rail­
road'coach travel than on other forms of travel. After experimental
rate reductions had indicated substantial increases in passenger
travel, coach rates were reduced throughout the South' from 3*6 cents
per mile to 1 .5 cents in 1 9 3 3 . When the southern railroads increased
fares to 2 cents in 1937 total passenger revenues decreased and the
rate of 1 .5 cents was soon restored. 2 / Pollòwiiig the 193 S increase
in rates, on ea-stern roads the Interstate Commerce Commission con­
cluded that net- revenue was less than, it would have been under the
lower rate -and ordered revocation of,-the increased robes. 3./
Studies b y the Coimission have indicated that on the basis of prewar*'experience decreases in ratos within the ranges of the experi­
ence resulted in an. increase in total revenue from coach travel, h/
Loss data arc available on the responsiveness of Pullnan
travel to price changes. In 193^ the Interstabe Commerce Commission
took the position that highway competition had less effect on Pullnan
than on coach travel. 5f The higher proportion of business travel
ahd the:higher incornò position o f mauy who travel by Pullnan on
personal business probably make changes in fares .of less importance

!_/ See p. ,22 below.
* '
2/ 237 Interstate Commerce Co mission 2 7 3 . .
3/ 237 Interstate Commerce Commission 2 7 1 .
; Ifyi' In ter state Commerce Commission,. Statement ■itfo. ^4-129» ^Preliminary
~ Examination of factors Affecting the' Pen and for Rail Passenger
• ' T r a v e l S e p t e m b e r 19^1.
5j 2lU -Interstate Commerce Commission 175» The Commission, however,
eliminabod. the surcharge on sleeping ahd seating space.

- 15

192

than in the cnse of conch travel. Air travel nay 'oe even less
sensitive to price changes. Price is an inportaht factor in the
case ò f -bus travel, but there. Is no;- chopper alternative, form of„.. .
public transportation as there ;is- in the case-.of coach travel.
This m a y tend to nake bus travel -less, responsive; to price changes,
than rail coach, travel. ,It is likely that a general, change, .in the; ••
cost- of paid transpor tati on has le.ss: effeet- cn .the .total-volune pf ..’.'V
travel than changes in relative costs would have on the volpile .of.
the different forns of travel. Hornally, however, the total demand
nay be, fairly responsive because of the-possible.alternative use of
private automobiles., l/
.
. , .
/
Puring the war the demand for public, transportation incropsed
greatly.' Uotat revenue passenger niles.no.se from.
.billion in.' \
19^+1 to 128c7 billion.in -19 UU. '(table l) The greatest increase : A.
both in absolute mileage
in Relative proportion was registered.. ,'
by. the railroad's', -which accounted for j6 percent of .'the. :i.ot.a.i,.
passenger nilds -in 19^4-, compared with 65 percent in ,19^1. Bus T}f*
pa.ssonger miles -doubled-from 19^1 to 19Mk* but, decreased from 29 .'1'.'ipercent of-the -total in 19^1 to 21 percent in 19^f... Passenger miles
on waterways' and airlines also increased, but declined ..relative t o .
the total. ■ The .wartime'iucreasos in bus and air transportation ' V\ \
represented a. continuation of the prewar growth in .these services. ’/.
In'the case of rail travel* however* the ,wartime increases w ere‘in .
contrast to prewar developments and the number of passenger miles
rose to a level more than twice the previous peak reached in 1 9 2 0 .
3>.

Outlook for the, industry

Since the close of ,the-war ■there has been a, substantial décline
in to teal intercity pa,ssenger travel-on public transportât! on far.,
c ìli ties, which has. been-, accompanied by an increase in travel by.
passenger automòbile. The shortage of new .cans, however, has pre- .
vented automobile travel from.-expanding, to. the proportion of the"
total which it reached prior-to the war. Passenger miles traveled
on railroads declined b y 30 percent from 19 ty> to' 19 U 0 and- the rail­
road industry has- estimated, that revenue- .passenger miles will
declino to about one-third of the peak wartime yea„r b y 1 9 5 0 » 2/

T]

A decrease in total cost would tend to result in, some shifting
to m o r e ■expensive forms of travel.
If. this were substantial
.itrnight result'in a .relatively -large, increase in air travel.
2/ As soci at ion of American Hailroads, Economie and Transportation
' Prospects, p. l6*+.

- 16 Bus travel was maintained at wartime levels in I9I+6 “but the number of
revenue passengers parried on intercity-schedules decreased hy 5 p-Qh-.
cent in the..first half of 19*+7 compared with the first half of.19^ 6v
Airline travel has expanded greatly since the close of the w a r .
(Table 5-);: These changes in general appear to he in line wijbh. the
prewar trends.
The decline in pe.ssenger transportation since the close, of- the
war is in large part, ¿attributable to the reduced needs .of the G-overn-.
ment. Government travel in general is exempt from the tax*. Trans­
portation charges subject to tax:, as indicated b y tax collections,
have continued to .hold at about the wartime peak level. .(Table 6)
Estimated consumer expenditures for intercity travel were marnt.ained
in 19^6-at the 19^5 level.
(‘
Table 7) During the war the ratio of
such expenditures to disposable income l/ nearly .doubled... Between
1931 end I9U 1 .the re had been little change in this ratio, b h t ;in the
la.tter year the ratio was substantially below the proportion .of
personal income spent for intercity travel in 1929 and 1930* A
decline from the present high level may occur after the postwar -...
adjustment has been completed and automobiles, become readily avail­
able, There arc.no separate data. on the trend of business travel
which.would indicate whether it is increasing or decreasing relative
to personal travel.
Apparently the different forms of public transportation will
bo highly competitive in the future and each has undertaken
improvements in equipment and service, designed to .strengthen itscompetitive position. The airlines apparently have on order about
as. many planes as are now in service,.which would indicate sub-,
stantial future-.expansion plans. 2
Purchases of intercity buses .
in 19^-6 were about 50 percent above the years 193^-1939 * (Table. U)
The railroads have not yet made significant purchases of new .
’.
passenger equipment, although the industry appears, to feel that
substantial modernication of coach travel will be necessary to meet
bus and automobile competition and is reported to have on order

/

17

J

2

Di sposable income represents income payments less personal
taxes. Department of Commerce data on income and expenditures
used in this study, except where otherwise noted, are those
issued prior to the revisions published in ”Fational Income,”
Supplement to Survey of Current Business, July 19^7Civil Aeronautics Board, unpublished data.

193
- 1? Table- 6
Collections from tax,on transportation Cf persons, monthly,
1 1941 T- 1947 j/ "''
I
t
(in millions)

Month

* - 1941; : 1942,: ¡1943
• * ,. -■
*f#;*

January
,
February
March
,
April ¿v.
May
June
July
i.
August
September;
October
November,, .5 2/
December. 2.1
Total

$ 3.*2
$ 7.9
8.5
2 .1/3.4 i; 5 10*2
3*3 ...
9.5
2.9 'V
12.7
3.8’ ;
8 .2
4 ..6 .
4*3'!
4.^ ...
5.ÎT
,4a .
...
:7.2'3/.
48*9..

13.6
14.2
14.8
15.0
12.0
11.9
138.5

; 1 1.944. ;
$ 1 0 .6

1945

1946

$ 13.4

$ 19.3
19.5
16.5
16.1

1 0 .6
' 17,5
1 1 .2 jjj ' 20.5 •
9.9 ’■
15.7 4'/
14.3

15.5
20 c3
17.3

21.4
2 0 ,1
2 1 .6
23.6
2 2 .4 y |■• 16.6
22.8 :
24.0
19.9
■:■ 18.0
21.6 • ■ 16,8
202.0

223*6

''1947

$ 17*9
•2 0 .8
È .16,7
h
.19.9
2 1 .0 , 17.1
15.3
17.2

20.4
'5 25.8
24.3 ,,• • 20.9
23.7 ,
25.3
27.9 -J. 25,1
17.1 .K
20 o9,;,:
242.0*

Treasury Department, Division of Tax Research,
Source? V Treasury B u l l o t i - n !
1J Includes seats and berths.
2/ Tax of 5 percent effective October 10, 19411
3/ Rate increased to .10. percent ..effective. November 1, 1942.
4/ Rate increased to 15 percent effective'‘
A pril l,,.rl'944.e; ~-.j

18
Table 7

Consumer expenditures| Ydr ’intercity travel
as a percentage of disposable income 1/
V ' • •
: ”
1929'* 1946 ■' • 1

2

é
1»

Year

«
•
• *..

1929
1930
1931
1932
1933
1934
1935
1936
1937
19381939
1940
1941
1942
1943
1944
1945
1946

• «;

■

'•%

Consumer expen— t
ditures for
i
intercity travel;
. (millions) | :
$ 521
422
•324 ,
252
224
243
'

1

245
318
345
327
345
353
409
643'
1,032
1,089
1,146
1,163

Expenditures
percent of
disposable
t income ;

Disposable
personal
income
:(millions)..

•

$ 82,484
'•73,688 '
62,977 •
'-47,819
-45,165 •
i >51,635 ' • •

♦6
*6
•5
«5

57,973
•68,317 •
'71,055 •‘
•65,465 •
r 70,167 '*
75,743 :•

*4
»5
*5
*5

92,015
116,197
13D,617
146,011
150,712
158,428

♦5

.5

*

.

>

*

.

fi
•6
.8
•7
V 8.
«7

Treasury Department, Division of Tax Research
Source?

Supplement.•to Survey of Current Business, July 1947,
p p 0 19, 43«
1_/ Expenditures include excise taxes* Data on disposable income
and expenditures are from the July 1947 revised series«

194
— 19 -

about 2,500 passenger cars* l/

'?r.

•i

The recent increases in passenger fares have-, b,ee.n small in
relation to changes in the general price level and in wage and
material costs.? Railr oad pa ssenger far e s .ar e only.about 20 per­
cent above the 1940 leyel- compared with the .increase of 60 percent
in the Consumers 1 Price Index*
(The increase;in revenue per.
pas senger>*inile. probably is smaller.)
It has been .estimated that
railroad wage, rates.'have increased by .more than .70 ^percent while-,
pr ices of materials and, fuel have.- almost •doubled, since 1 9 4 0 * 2/..
The railroad .passenger•business has reverted to the. unprofitable
position wrhich existed for a number of years before the-war.
Fata on the.prof its of the -bus lines are limited* The carriers
reporting to the Interstate Commerce Commission showed some decrease
in profits in. 1946 a n d .a :much larger decrease during the early part
of 1947. zj. From the reported information it is not possible to. .
determine how the present; profit position -of the industry compares
with its prewar, position. During the last- (Quarter of ,1946.-and the
first quarter of 1947 the airlines reported substantial losses on
domestic operations*-'. Following the rate increase in April 1947,,
the -operations''of:domestic; airlines as a -whole showed a. profit for
the Second quarter of 1947* 4/ Transportation companies operating
in the coastal and- foreign fields receive various types of Govern­
ment assistance and the prospects of- these concerns depend to a
substantial extent on national policy with respect to the .shipping
industry; <
■ w

ij "Association" of American Railroads, unpublished data-.
2/ Ibid;
.
•
3/

bj

The number of reporting companies varies from.period to period.
For 19^6 the net income before income taxes of intercity carriers
was 27 percent less than, in 19,^5 ■'.and for the•first- six-months of
vskii was 5^ percent less than for the same period -in I9 U 6 .
(interstate Commerce Commission, “Statement Ho. ;Q,-750(BRE) ,n 19^6
and first'two charters of 19^-7 ♦)
The 'repoPte'd "losses in the last -auarter of 19^-6 and the first
'quarter of I9 U 7 were $11,0..million and. $1 9 A million, respectively.
’Reported-profits in- the second quarter of 19^7 were $2 .U million.
'(Unpublished data of" the. Civil Aeronautics, Board.)

~

7.

20

-

Effects of the tax
A.

On profits ; '

—
■ ‘

The ..operation of. passenger transportation facilities at
capacity during the, war resulted in increases in income for the
industry.
(Table 3) Thè railroads reported an excess of
operating revenue.over operating expenses on passenger operations
for.the first time since 1931». The improvement resulted prima­
rily from the increased volume of traffic. Rail and bus rates''
were increased b y only about 10 percent and airline rates'
actually decreased. In view of the largò excess:òf demand for
travel.it_. is doubtful whether the existence of the tax had a
significant Offeet on profits during the war period V
However, the abnormal, wartime experience with the tax does
not provide a basis for determining its effect òn profits under •
peacetime conditions. When àutomobile demand becomes satisfied'
arid other, factors affecting demand and supply in the transporta­
tion industry have become adjusted to a peacetime basis*" it is
likely that the present tax would haVe a significant effect on
the profits of the industry.
There has, however, been'ho éx-'
tensive peacetime experience" with the tax which frould indicate
how responsive the total demand for transportation' services may
be to the changes in the cost of tran sport ati'bn-. Business and
the most urgent personal travel are probably not'greatly affected
by the increased cost represented by the tax. However, the •
possible substitution of automobile travel suggests that the
volume of pleasure travel may be materially affected by the tax.
Olle extent of reduction in travel on public facilities and the
seriousness of its effects on profits may be substantially
different for the several forms of transportation.
The prewar history of railroad'rates indicates that coach
travel is rather sensitive to changes in passenger fares.
Accordingly,under normal'conditions", the profits of railroads may
be affected substantially by the existence of the tax. Because
of largo fixed cósts- a small- decroa.se in passenger revenue can
have an important effect on profits from passenger operations.
Since railroads are again showing deficits on passenger operations,
any reduction in traffic resulting from the tax would-àdd to their
difficulties. Bus travel may be somewhat less sensitive to in­
creases in the cost of transportation and tho possible continuation
of an upward trend in this form of travel would tend to offset in
part reduction in travel caused b y the tax. Similarly, the favor­
able prospects for expansion of demand for air travel would help
to offset the effects of the tax on the volume of traffic and
profits. However, any reduction in passenger traffic of air linos
tends to require larger payments by the Government for carrying
air mail on some linos.

Table S
;;; Selected income data on intercity passenger
transportation b y railroads,, buses and airlinesy 1935 - 1945

■:
;

'"'"'.a 7

R a ilro a d s 1/

i

Buses 3 /

;:
■■■/
•
N et :
revenue
P e rc e n ta g e .;
Hot ' ; :
• from'
r a t i o o f . : o p eratin g :
Year :
!* • passenger
expenses- * income 2 / *l
to
(000,000) l
&
: o p era tio n s •
:
. revenue
1
-, • (000,000)

’■ Hot
income
b e fo re
ta x es

■

1935
1936 *
1937 .193 «
1939
19^0
19 U 1
.1942

- 1 3 2 ,6

120
122
121

- 1 * 5 >3

!23

- 105 A

114

3 0 0 .6 .
732.7

19*3

19^
19 U 5

;

129 t
119

5/
$.- 121.8
- 1 3 1 .9
. - 133*2

7 2 1 .0
5 O 3 .5

-is
A

$5
6s

77

*
$

'

'

2 3 3 .3

,

■2^1.6
255.3
25 O .9
2 6 2 »!

:

(000,000)
H
il
■

5 A '•

SA

2 2 6 .1
sg.3

2 3 .6
19 >4
/ 3 2 .2 .
8 3 .4

279.8

128.0

234.I
- 2 3 0 .1

130,0 '
, .110.4 ...

4

.
*
A ir lin e s '4/ .Domestic' '
: ••
• In to ¿ n a tio n a l
4
: P ercentage :
4.
y; •Percentage

.O perating r r a t i 0 o f
p r o fit
: . expenses
(.000)
:
to
: revenue
ll4

$■- 3 ,2 9 9
- 75i!
154

■> 1 ,5 0 3
,

1 .3 9 9
7 ,0 5 1

•

5/ ;
5/

102

100
104
; 97

89

.3,866

95
87

-, 1 4 ,2 8 7
3 0 ,6 5 6
26,7 2 9
4 3 ,1 2 0 -

i 'O pcratins: : r a t i o o f
:
p r o f i t \"i .
-expenses
:
(000)
:
to
Î ; : ..
revenue

,

:
73 A A

80

' 78

•

-

1/ ;
“

:
$ * m
. •h ,

:
*
m

9,082
2,711
* .-. 2,-143

■"

5/

v

5/
5/

5/
5/

■ •;

5/
5/

'

:
. 79 ::
.: 85

•
'

79
93

te.i-.

' • 94
105

Treasury.Department, Division of Tax Research
Source!

'Interstate* Commerce Commission, Statistics of Railways in the U nited States, and Statistics of
Class I Motor Carriers; :Annual Report of the Civil Aeronautics Board", l ^ O - l ^ S . '
—— —

lj. Class. I l
2/
¿A
4/
5/

i n e - h a u l : ..a
.
7 a :;
. 4-,.’- -ya'h-,.';-".'Not revenue from-passenger operations minus tax accruals plus- rent income minus rents payable.
.Class I passenger carriers reporting to 'Interstate Co rmerce Comission:, Hot comparable;'from year
to year because of different number of companies- reportingV "•
,
■
Scheduled lines reporting to Civil Aeronautics Administration^ ■ Includes mail, express and, freight
services* 'Figures are for fiscal years ending June 30.
■1 • -1* •
Z
. j
Hot available.
f_ a
CO
cn

22

-

The effect of the tax on profits of the transportation system
is a matter of national concern because of its "basic importance
in the economy* Redactions in profits and consequent deterioration
of service might require the Government to assume further responsi­
bility in this area. In the case of airline and waterway traffic,
for which benefits are now provided b y the Government, decreased
revenues resulting from the tax might necessitate larger Government
expenditures in support: of these services. ;.
y
B.

On business costs and competition

It appears that a substantial' proportion of travel by public'
trarsportati on is for busine'ss purposes, although information on
this malter is limited, l/ Information on the rela-tive importance
of travel costs in the op or add on of different types of business
is not available. However, to the extent that there are differences
in business use,1 the tax discriminates against, those making most,
use of the- service.. Moreover, where competing businesses are lo­
cated at different distances from the points.to which their repre­
sentatives must travel, the tax serves to increase, the difference in expenditures for transportation service.
The -tax also: tends to create competitive inequities among tide p
transportation agencies providing different types of service. T/Jhere
the price, charged for flic .service differs,' the tax serves to incres.se
'the differential and thus tends to produce a,'shift in travel from A

ÎT/ A representative of the industry has expressed the opinion' that ,
50 percent, of railroad, travel is for business purposes.- .(House ;
of Representatives', Hearings before, the Committee1on lays and
Means, Part 1, .SOth Congiress, first session, p. 1 6 5 ) A survey by
the Works Progress Administration (’'Survey of Passenger Travel
for the Office of Defense Transportation, May 22— 22!,'.
*11 '-re­
leased -June 11, 19 '42/ indicated that about 50 percent of the
persons interviewed were traveling'for personal reasons.A Depart­
ment of -Commerce estimates on- 'consumer s’ expendi tures ip I9 U 5 flso
indicate that at leant half thé.’.total expenditures .for intercity
travel- were-for personal reasons.- Since, during the- -war years
there; was considerable'' travel by members of the ammed.,farces and
civilian.employees of the Government, personal travel may normally
account fqr "substantially more I h a p ^ Q pefcbht,of total ’
t rans­
portai! on ■revenues. Prom 19^5 to'. 19,^6, when total passenger'
revenues of.carriers declined substantially, estimated consumer
expenditures for intercity travel remained approximately the same.
The data indicate that a. lower proportion of Pullman travel than
coach and bus travel is for personal reasons.

196
- 23 -

the higher nriced to the lower priced service, l/ However, as noted
in Section IV C above, an increase in price may cause a, relatively
greater decrease in travel'in the case of the lower fare service, of
railroad co.aches and buses than in the case of Pullman and air.
travel, and this may more than offset an;/ shift to the lower nriced
forms of transportation.- The tax tends to discriminate against all
transportation agencies operating for hire where private travel
facilities may be used, as in the case of the automobile and Air­
plane* As a result of the amendment, effective April 1, 19^7»
generally exempting travel outside the northern portion of the
Western Hemisphere, the tax discriminates■to some extent against
transportation companies and proprietors of resorts serving the area
in which the tax is. still applicable* ;
,0.

On consumers.

Transportation expenditures are' not large in.relation to total
consumer expenditures;- the present tax increases the total Index of
Consumer Prices by about .02 percent«. The tax probably constitutes
a higher proportion of income for the lower than the higher income
groups* The tax on transportation expenditures made by business
firms is likely to be reflected in prices paid by consumers in the
long pun, and thus be distributed regressively in accordance with
consumer expenditures. On the basis of lO^-l family income and
expenditures, direct consumer expenditures for interurban trans­
portation in the income class below $500 wore about twice as large >
in relation to income as expenditures In the income classes between
$500 and $5,000. 2/ A 1 9 ^ study of urban consumer expenditures
alone indicated a, relatively greater increase in expenditures for
the income classes under $ 3 »000 than for those between $3,000 and
$5,000* 2/ This may reflect a relative increase in the movement
of the working population during th'e war.

ly If coach fare is'$20 and bus fare $15 before tax, a 15 percent
tax will make total costs $23 -and $17*25, respectively.
The
tax increases the difference in costs from $5 to $5*75 or by.
15 percent. .
2/ Based on Bureau of Labor' Statistics, Family Spending and Saving
in -Wartime Bulletin Ho*- $22, April 19^5 ’ Bureau of Agricultural
Economics, Rural Family Spending-and Serving in Wartime,
Miscellaneous Publication Ho. 520, June 19^3*
2/ Bureau of Labor Statistics, unpublished data.

- 2b -

The tax has the .effect of Withdrawing no re purchasing power
lx*on the income stream during periods of high husin-ess activity
' than in periods of low "business .activity* During the period 1929
■ 19 UO expenditures for travel fluctuated"substantially more than
changes in disposable .income, 1/
VI.

Adninistration and compliance

-

This tax in general is.not difficult to administer,. .^It is
collected for the Government b y the transportation companies and
it is estimated that *only'approximately
0 0 0 •returns.ar.o filed.
Some problems arise as to whether a vehicle: is being operated on
an established line, how the 35 -cents-per-person exemption should
"bo calculated for trips by groups, and the application of the ta&
• to transportation not. of the regular commercial type. ^The exemption
of foroign •travel has caused some difficulty in- determining pro*
cisely what..part ,of travel is tax exempt and what part is taxable.
HI.

.-Technical problems
The principal technical problems that arise under this tax

£tro 1
1.

2.

A.

The treatment of»foreign travel,
The exemption of non-scheduled a,irflights
. carrying no more than 10 passengers
including' crew.

Treatment of foreign travel

Under the Revenue Act of 19^3 the tax on transportation of
persons applied to all tickets for which payment was made in the
United States for travel within or without tho United States.
Section S (a) of the Excise Tax Act of 19 U 7 amended.the Internal
Revenue Code to provide that 11The tax shall not apply with respect
to transportation
any part of which is outside tho northern
portion of the Ucstern Hemisphere ...,u The existence of the two
■areas results in discrimination' against travel within the taxable
area-comprising generally the United States, Canada,- Mexico and

1 / , 3 a s o d o h Department of Cornerce data,. On the average, a change
of 1 .3 percent transportation expenditures was associated with
a change of 1 percent in disposable income.

*■'25 -

Central America ami favors travel to European, Asiatic, African and
South American points, l/ There are two types of discrimination,
first, "between domestic and certain types of foreign travel and
second, "between foreign travel to different areas. The second type
of discrimination could be removed by further restricting the taxable
area, further restrictions, however, would raise increasingly
difficult administrative problems. Under the present exemption most
travel outside the taxable area is to points- at some distance beyond
the taxable zone. Limitation of thé tax to travel in the continental
United States would involve an allocation between the taxable, and
non-taxable fare -in the case of the extensive travel to bordering
countries and the Caribbean area. Moreover, since Canada, also has a
tax on transportation of persons there is the problem of having a
uniform basis for the tax in both countries.
If the tax is not made
applicable to travel regardless of destination, it appears that there
is no feasible way of preventing discrimination and avoiding adminis­
trative problems short of repeal.
B.

The exemption of non-scheduled air flights.*

The present tax exempts transportation by motor vehicles having
a passenger seating capa.city of less than 10 adult passengers
operating otherwise than oh an established line. A similar exemption
has been proposed in the case of air travel. However, travel of this
character does not seem to bo comparable to the exempted transporta­
tion by motor vehicles. In the le.ttor case the exemption applies
principally to transportation by taxicabs and is in line with the
specific exemption provisions of the law which apply to amounts paid
for transportation which do not exceed 35 cents, the amount paid for
commutation or season tickets for single trips of less than 30 miles
or commutation tickets for one month or loss.
These exemptions are
based principally on administrative considerations, because trans­
portation of this character involves a largo number of transactions
for short distances and comparatively snail amounts, with tho result
that collection of the tax and the keeping of records would bo very
burdensome to the carriers. Hon-» scheduled air travel, on the other
hand, does not present any particular administrative difficulties,
and it is possible tha,t the exemption of such travel night increase

1 / Under the present limited facilities for foreign travel, the
exemption has less tendency to stimulate shifts in travel than
it would under less restricted travel conditions.

- 26 administrative problems "because of the necessity for distinguish­
ing "between scheduled and non— scheduled trips. . The exemption -of
'■■■•non-scheduled- air flights, moreover, would give rise to inequities
and might stimulate' avoidanco of the tax and result in a- sub- stantial loss of revenue. The charter of airplanes for special
trips generally involves .the payment of sub stantial,-amounts .fo.n
transportation services, and.may represent the purchase, of special
conveniences .in connection with transportation.
The. exemption
would result in tax savings which would "Change the relative cost
of scheduled and non-scheduled trips, l/

T/
'

The tax on a party of eight persons traveling "by scheduled
airline "between Washington and Chicago is approximately
$72 at present rates. The tax on non-scheduled trips.would
depend upon the charge for such trips.

198
- 27 -

PAHT

I,

II

—

Excise* Tax on Transportation of Property

Description of the tax

^

:

tef|

l/

-■ j

"

The tax applies to amounts paid within the United States for the
transportation of property from one point in the United States to
another by rail, motor vehicle, water or air« Only amounts paid to
a person engaged in the business of transporting property for hire are
taxable, 2/
Shipments from a point without the United States to a
point within the United States are taxable only on that part of ’the
transportation which actually occurs in the United States and for
which nayment is made within the United States# u-ne tax on. .the trans-*
portation of coal'does not apply to the transportation, of coal with
respect to which there has been a previous taxable transportation,.
The tax is payable by the person making the payment for the
transportation, and is collected by the person receiving the payment#
Principal exemptions provided under the tax are;
•• ' ; ;

-•*•** ‘ .

{¡w V f ’

,"v

1 . Payments for transportation to and from State and
local governments,;an international organization, or the r
Red Cross-. ■. •>
..
- •
.-.V ■ J 4 ,•;

2. Payments to the Post Office Department for
transportation of property#
.
3 . Payments for transportation of property to or from
the United States Government shipped on a Government
bill of lading.,- 3/. . . .
:
•. :
II •

Changes in the tax since 1917

A tax on the transportation of property was levied under the
Revenue Act of 1917# The tax'rate and the effective date of changes
since that Act are shown below;

IT

a separate excise tax levied on the transportation of oil by
pipeline is not considered in this study,
2 / Including amounts paid to a freight forwarder, express company and
similar persons, but not amounts paid by a freight forwarder,
||
express company, or similar persons for transportation with
respect to which a tax has previously been- paid#
•••
3J Exempted by order o f ‘the Secretary-pursuant to -authority of
Section 307(c) of the..Revenue Act of 1943, as amended.
Federal Register. Volume 12, p* 4139.
'• 1

- 28 -

Changes in tax rates since 1917

Revenue Act

•
•
•

Effective date

Repealed

, Jan* 1, 1922

.....
a/

•. v —

3$ of charge

Dec. 1

1942

Raté
.
*

•3$ of charge

ITov* 1

1917
1921 !

•

,9
•

Id/

aj On parcels or packages by express, 1 cent per 20 cents
or fraction thereof*
b/ ^ax on coal, 4 cents per short ton*. max does not apply
to transportation of coal with respect to which' there
has ‘"been a previous taxable transportation,

III.

Revenue collections, 1943 ~ 1947

...»

Collections from this tax are approximately the same as from the
15 percent on transportation, of persons* Annual collections are shown
below;
Collections, fiscal years 1943 ~ 1947
(In millions)
Fiscal
S Collections..*•
year______ s______________ '* »
82*6

1946.

1944

215*5

1947

1945

221.1

1943

IV,

fiscal
year

$

t. Collections
.. *

--------$

220.1
275 07

Economic background of the Industry

Vh© effects of the tax oh transportation of property which appear
to be most significant are those that arise from its impact on the cost
structure of the economy, the competitive position of the different
users of transportation service and the choice of different methods of

- 29 ~

transportation» l/ Some understanding of the general supply and demand
characteristics of the industry,' however, is essential to analysis, of
these effects as well as of the direct effects of. the present tax on the
volume of business and profits of the transportation industry®
The Industries engaged in the transportation of property account
for a larger proportion of the national income than most other industries®
In X946 the income originating from transportation of property tyas larger
than the total originating from mining, communications, public utilities
or cons truc t lo ne -2/
A„

Character of supply

Carriers of property may be grouped into two broad classes —
intracity and intercity® The volume of intracity traffic is not known, z]
but it appears that the bulk .of taxable transportation is of the intercity
type* ”’he volume of intercity freight transportation increased from
about 500 billion ton-mile,s before the war to nearly 1,000 billion tonmiles in 1944.- (Table l) The railroads transported nearly 80 percent
of the total in 1943 compared with a little over two-thirds prior to
the war» ^hey probably carry a higher proportion of taxable intercity
shipments, however, since a substantial part of both motor and water
shipments is carried in equipment owned or rented by'1the shipper and is
not taxable under the present law0 The inland water carriers before
the war handled nearly twice as much traffic as motor carriers® 4/ The
amount moved by airlines ip relatively small«
The industries transporting property for hire are generally
subject to Federal or State regulation® At. present Federal agencies ■
regulate about 23,000 operating freight-carrying concerns, of which
approximately 21,000 are motor carriers® 5/ Most of the revenue

1/ These questions are considered in Section V, below».
¿2/ ’‘National i n c o m e S upplement to. Survey of Current Business,
July 1947o
,
3/ In 1935, the latest year for which complete data are available,
approximately 50,000 firms owning about 100-000 trucks were engaged
in the business of local transportation of property for hire»
(Census of Business? 1955» ’’Motor Trucking for Hire»”) In addition,
a large number of trucks was owned by shippers®
1/ Bata on ton-miles are not available for coastwise shipping, but
prior to the war coastwise vessels accounted for about 20 percent
of the- total cargo carried by domestic water carriers« Statistical
Abstract. 1940» «
5/ Unpublished data of the Interstate Commerce Commission* The number
of companies subject to State regulation is not known» Apparently
all States regulate the weight and size of motor carriers and
mosf of them regulate intrastate rates«

30 Table 1
Estimated volume of intercity traffic of freight,
public and private, by kinds of transportation, 1937-1945 1/

'T’otal

Year

1«
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946- P

S Airway
Motor i Inland
3 Railroads 2
waterways
3
carriers
i
!
3/
!

Volume of traffic (In billions of ton-miles)
517o75
396o27
475«36
548o23
679«34
844„07
S 24 »6 2
946*66
889045
791»40

363*61
292*51
336c10
379c16
481*75
645*26
734*72
747*17
690*99
602*20

44*00
37.00
43*00
51 »00
57.12
50 o 21
48o20
49*31
55 o62

66 »00

110ol3
66*75
96 *25
II 80 O 6
140*45
148*57
141 *65
150*11
142*76
123*10

»009

«010
»011
«014
»016
«033
«052
»071
«091

«100

2 » Percentage distribution
100 cO fo
100*0
1 0 0 ,0
100*0
100,0
100 „0

100 c O
100*0
100*0
100*0

70*2 io
73*8
70*7
69*2
70c9
?S,4
79*5

CO

1937
1938
1939
1940
1941
1942
1943
1944
1945
1946- P

77*7
76 »1

8«5 fo
9o3
9*0
9»3
8*4
5« 9
5*2
5*2
6»3
8*3

21*3 io
16» 8

4/

20*2

4/

21*5
20 »7
17*6
15*3
15 c9
16ol
15*6

kJ
4/
4/
4/

4/

Treasury Department, Division of Tax Hesearch
Source!

Interstate Commerce Commission, Annual Report, 1937 through
1945»
1/ Excludes pipe-line transportation and coastal shipping,
2/ Steam and electric railways» Includes express and mail«
3/ Domestic revenue service» Includes express and mailo
4/ Less than 0*05 percent«
P - Preliminary«

200

freight,'however, is. carried by the .loss.thpji 1,000 railroad companies.
The fixed investment in those'industries; is--very 1ojt§0; ..Equipment and
facilities cannot readily he shifted to-alternative uses, particularly
in the case of railroads where the investment in roadway is very sub­
stantial and the equipment very durable. The amount of service rendered,
however, can. “bo varied substantially in response to changes in demand
"by .altering schedules, spe ed. of travel,' and. the number of units placed
in' service. '•
,
’i
}
'
-, ‘ *
. There is-considerable competition among the various types of
carriers, but'it is limited by considerations of speed,, cost, and
suitability for particular shipping.problems* Water carriers, which
operate only in certain areas, and the railroads provide low-cost,
transportation for bulky shipments* Motor carriers are more generally
confined to handling goods having a high value per pound in intercity
transportation "but perform all types of local hauling* Most airline
cargo consists of high priced goods or expedite shipments^
p
Although railroad freight traffic has declined relative to total
intercity shipments, 1/ unlike passenger traffic, the absolute amount
continued to increase during the-. 19301s* Jit the outset of the war the
ton-miles carried by railroads was nearly as, large as the peak traffic
of the 1920*3* Moreover, the. competitive position of the railroads
has been strengthened by improvements in facilities and service*
Substantially less equipment is now required in relation to the volume
of traffic (Table 2 ) and increased efficiency has been reflected in
other aspects of operations* 2 ^ *Less information is available on the
trucking industry,’ but total truck production in the latter part of the
1930*s reached a higher average than in the years preceding the
depression* 3j There was also some growth in the capacity of water
carriers. 4/ The future role of air freight transportation has received
increasing attention since the close of the war and involves considera­
tions of public policy which have not as yet been resolved*

1/ Wald, Easkei P u, "War Strengthened Railroads Pace Hew Prospects, '1
Part ii, Survey of Current Business, December 1945.
2 / Eor example,
tractive .effort (pulling power) of freight locomotives
increased by about 60 percent .betwe-en 1921 and 1941* ( Interstate
Commerce Commission, Statistics of Railways in the United States,
.1929j 1945) « /
3/ Automobile Manufaoturers Association., Automobile Pacts and Eigures,
27th Edition, 1946 and 1947*
-|
4/ In 1930 the total number of ships engaged in coastwise and internal
trade was 21,025 with a combined tonnage (gross registered tons) of
9*8 million; in 1941 the figures rose to 25,636 and 11*1 million,
respectively, (Statistical Abstract,)

- 32 -

Table 2
Railroads’? Hummer- of freight-carrying' c^rs o w n e d .or leased*average'capacity», new cars installed, revenue ton-miles.and
ton-miles 'per car-mile,. 1921 — 1945 1J

Year

l
AV tiiel£,ti
Treight-carrying cars,*
¡number
of ton*
owned or leased j§/ ’ New cars * Revenue
*
miles,
per
carinstalled * ton-miles s mile.(loaded
,
Average
:
■f • Number
*(.billions)
’f . movement)
(thousands) : capacity i
f
r.: (tons) ;
» f‘ ’
■1

1921
.1925

,

2,316

42*5,

2,357

44.8

1929
' "'2,277 .‘ 46.3 ’
2,277
.1930
46.6
1931 (
2,201
47.0.. '
.1932 .
2V145 • 47;0
1933/
2,035
* 47*51934
1,938
48,0
19,35 '
1936 1937
■
• 1938
1939
’•
1940 ‘ ' .

1,836
1,758
1,744
1,700
1,650

48.3
48,8
: ,49.2- •
-.49.4
49,7
50,0
lj'654 -

.1941 .1,703
1942 ’
1,745
1943
.1,756
1944
1,770
1945
1,760

50.3
50,5
.50,7
50.8
51.1

. /

1 /.;
3/
3/ ■
3/

f M t

■

2,815
1,936
23,948

' 306.8 ; _ 1.27,3 :t
413,-8

’

26*9

V 447.3 ? - . 26*9. /
383.4
26*5
'25.6
•309.-2
234.0
.
24.7: -V
249.2 '
'• 25e4
268.7. •.25.5

6,987
_ 282.0 '
.37,554.
.. 339.2
360.6 •
69,11.8
15,213
. . 290.1
.23,236
333.4.
..373.3
.60„455 .
76,392
58,595
28,000 '
38,970
37,132

treasury Department, Division of Tax Research ’

'

475.1
638.0
727.1
737.2
681.0

’ 25.8, ;
26 o8 .
. 27.1
26*0 .
26.9";

27,.6 ;
- ‘28.4
■/. - •31 o8
33.3
32.6
32,2

..

'Source? ’Interstate Commerce Commission^ Statistics.of Railways in
•' the- United States,-1929. 1939 and 1945
1/ Class I line-haul railways® Excludes private freight-carrying cars,
which decreased from’296,000 at* the end of 1935 to 268,000 at the
end of 1945.
'
",
2/ As of December .31.•
3/ Not available»
;
v

201
- 33 -

3«

Rate» and costs

*

-,

The freight rate structure is very complex. Rates vary according
to region, zone, class, commodity, weight, hulk, value, and direction
of movement. In the case of railroads five major rate territories
are recognized, some of which are further subdivided into zones, and
within each territory and zone there are a large number of class rates.
These vary widely by regions and there are numerous exceptions to class
rates. 1/ About 80 percent of freight traffic moves on commodity
rates and is fairly independent of either rate territory or freight
classification. The report of the Board of Investigation and Research
commented as follows on the lack of uniformity in rate structure»
Such differences grow out of different conditions
existing within the various territories, and differences
in the views of rate-making officials concerning a
reasonable and proper rate structure. Each rate struc­
ture is the product of the policies of rate-making
officials of the railroads, with whom initiative in
rate making rests modified by the pressures of shipper
groups seeking rates which would be advantageous to their
interests, and modified further by the policies of State
and 'Federal regulatory authorities.. 2/
Motor carrier rates average higher than rail freight rates, while water
rates are generally lower. However, considerable study is usually
required to determine the most economical carrier for any particular
shipment because the type of carrier whose charge is generally higher
may furnish the Cheapest transportation in some cases.
Tnere have been few general changes in railroad rates during the
past 30 years and the most important have been associated with wartime
changes in the economy, ^he general level of rates in effect-at the
outset of World War II did not differ much from that established in
1920. A temporary increase of 4.7 percent granted in March 1942 was
suspended in May 1943 because of increased profits. The first permanent
1J House of Representatives, Summary Report on Study of Interterritorial
Freight Rates«■ House Document Ho. 145, 78th Congress, 1st Session,
March 3, 1943, p. 2. Class I rates in zone IT of the Western trunk11 ne territory were 84 percent above those in the eastern territory
in 1938o .
2/ Ibid, p* 3.

- 3^ -

increase over prewar rates, averaging about 18 percent was granted in
December I9 H 6 , superseding an interim increase of 6 percent granted in
June of that yea„r. Rising costs have resulted in a -further request for
increase in rates. As amended, the increase requested would average
about 30 percent. An interim increase-averaging about 9 percent was
granted October 7* 19^7* .pending further consideration of the request
for a permanent increase. Although there have been exceptions, railroad
rate-adjustments have generally been accompanied by corresponding
changes in motor and water carrier rates.
C.

Character -of demand.

. .

The demand for transportation service arises principally from
business requirements and varies with the type of commodity transported.
Since transportation costs generally are small in relation to the total
costs of business, it would appear that the use of transportation would
denend more upon changes in other costs than in the price of transportation.!/
Important exceptions exist where transportation constitutes a large, per­
centage of total cost of a product. 2/ There is no evidence that the
aggregate demand for transportation service is very responsive to changes
in .rates., 3./ An increase in rates tends to limit the market area. U/
However, where a rale increase may force one shipper out of a market the
loss of this business will tend to be offset in substantial part by
increased business from other shippers. A more important effect of a rate
increase on public transportation may be the possible loss in traffic to
privately owned carriers and shifts from one type of carrier to another.
Direct consumer usé of facilities subject to the tax on transportation
of property represents a small proportion of the total and the demand
probably is determined more b y other, factors, such as the necessity for
moving, than by the cost of the transportation.

if It has been estimated that in 1929 transportation expenses represented
13 percent-of total manufacturers 1 cost of preparing and distribut­
ing finished commodities-- (The Twentieth Century Fund, Inc., Does
Distribution Cost.Too Much?. 1939* PP* 117~11S*)
2j Section V, below.
3/ There has been no indication that the average increa.se of 18 percent
made in December,-19^6 materially affected"thb volume of traffic.
Conditions, however, have been abnormal because of the shortage of
facilities. ‘In the rate discussions of the-Interstate Commerce
Commission less consideration appears to have been given to the
effect of rate changes on demand in the case of freight transporta­
tion than pa.ssenger transportation.
bj "Tentative Report of the Committee of the Rational Tax Association
on Taxation of Transportation , 11 Rational Tax Association. Proceed­
ings of the Thirty-ninth Rational Conference on Taxation, 19^-6.

D.

Outlook for the industry-

. . ,

for the near future the* volume of .freight transportation is ex­
pected to tax available facilities. The'railroads experienced sone
decline in volume and in revenues in I9A6.' During the first 9 iaonths
of 19U.7 the volume has exceeded that for the sane period in I9U6 by a
substantial..nuargin while revenues hMjve increased relatively more due
to rate increases. * (Table 3 ) Operating revenues of bjoth motor and
waiter carriers reporting,to the Interstate Commerce Commission in­
creased in 19*4-6. l/ Despite the large volume-•of -traffic and higher
rates, profits have been adversely affected by rising costs and.
additional rate increases have boon requested by the ra.ilro.ads," Until
the post-war transition has progressed farther, it is difficult ■to
secure an indication of the shifts that may »take plane in the traffic
of diffclient carriers* Bath -motor and rail «carriers report inability
to secure 'equipment to:meet current demands'. Z J
Effects of the tan:

7 ,

.
.
.m ^

• :

,T~

TTTT,,T--T

'

-

: ‘

,r
'■
A. 'On-Profits of the* transportation industry
yl

■■■;■.■. * '

-

■. ^

./

- ?»>., ,

- v*.

V

Dor most of the' perio*d since, this tax y&s imposed the transporta­
tion industries have operated at or near capacity and during .the war
income was much higher than the prewar level’, (’
Table 4) Railroad
profits tjerc particularly favorable and the temporary rate incrcane
in 19^2 was rescinded boconso of the large increase in profits. Be­
cause of supply limitations it is, doubtful whether the tax has had a
significant effect on carrier profits. Under more normal conditions
the tax would probably have, some effect on the volume of traffic and
profits. Because of-high fixed costs a reduction in the volume, of
traffic- haJfe a. proportionately groator effect on profits. However, in
view of th’
e probable -unresponsiveness of the demand for freight
,
transportation to changes In the cost of such transportation and the
relatively’low rate of the* present tax, it i*s doubtful whether the
profits of* the industry would be affected very substantially by the
tax.
^.
•
".
y & m
^/ Revenues of motor carrip-rs increased from!-$7^0 *5 million in, 1945
to $871,1 million in 19 ^ 6 , whi lo revenues, of water carriers.rose
from $6U,3 million in I 9 U 5 to *90.3 million in I9 U 6 . (interstate
Commerce Commission, ”Statement Ho,
Year 19 ^ 6 , and
”Statement No. Q-650*,”• Year 19*46.)
'
'
*
2 j

About one-third of railroad freight cars are more than 2p years
old,.. Murphy, Thomas' J., 'U-Teed for Dreight-Cars; is Becoming More. :i
Urgent,” Domestic Commerce, July 19*47*
'

-f. 36
Table. 3.%

|gg

.

.

•; Railroad, freight revenues and.revenue
ton-mile s '-of fr eight ;carr led., -■by. months#
•’ \~ 5
* 1945 - 1947 if, . •si,-,' • ' -

•

3

Month

1945. ••

f
.

i

1*

July
August
September
October.
November
■ ;’
December

••

•

?Total ?

' 1

1947 •

9

r

$ !558»7
536,7 ’1
623,1
- '' 594.2 f '
626.2
610.9

;;

1946 '

... r? t

Freight revenue ([In millions')

?

January ;
February f
f Mar ch
*?
April
May
June

3

J-

-■
î t Æ

569*4.
547 y5
; 488.5 ...
" 492,5
.
•
;463.9
•• . -401.4
•
•

$ 453.6
421,5
. 484,0
■ - 412.0
399.4
458,6

..
'.

•/ $ 551,3
.• 518¿9
592.5
- /565vl
592/0
.557/2

•

,

513.4- ... .
546,3
,515,8
.. 567.2
• ..
• 523.0 .
494,1.

6y533,1

.. 5,789*3

m

558/2
596.9
• 593,2

■i■ M

m

2, Revenue ton-miles (in billions)
January
. 56*8 .. . .,
,48.2
February <
55,4 •
.45,1...
64.4
March
• 52,4
. April • .^r-. • . ■.61.4 .
,-Vv: 37,4 ...
•
■
64-,2
■
.May x ' •:
. ...- 39.5
June68.5
49,8
July
. August
. September
October
November
December
.V

jrptaiv;

60,7
56,8 . - •
i .I ;
52.7. . \
. •¡49t8
'4.9.8
’ -45.,3 . * & \ • •
680.,7- '

51.9
55.8

52,9

.
' J|f

,57*4
51,9
49,6.

■

.

..
■- ..

' 53.3
.48/5
. .56,1
,50/7
- 56.¿1
' 53,4
51,0
58,0
56,1

j.

/'y.’ ; '592,0''

Treasury Department, Division of:.Tax De search r
Source; Interstate Commerce Commission,
1J Class I line-haul railroads*

’’Statement Mw320!V

■

203
- 37 Table 4

Selected income data on transportation of property
by railroads, motor and water carriers, 1937 — 1945 1/
, (in millions)

: Net revenues
from freight
: operations of
s. railroads
•
(Class I)
v

Year

1937
"Í938
1939
’ \ 1940

$ 1,173.4
973*9
1,206*9
1,350*1

1941
* 1942
1943
1944
; 1945

1,785*9
2,562*4
2,663*6
2,431*6
,1,345*1

? Net operating :
Net income
:
revenue of
before taxes of
:motor carriers 2 /* water carriers
?
a
j
• ;■ (Class I)

á/
:

$ 8,7
20.7
21*5
31*3
40.9
30*8
24*7
7.2

$ 66*6
39.5
58*1
1C8.6
172.1
145*9
113.5
i/
H

.

Treasury Department, Division•of *Tax Research
Sources;

1/

2/
3/

4/

Railroads and motor.carriers. Interstate Commerce
Commission, Statistics of Railways in the United States,
Annual Renor-f- of the Interstate Commerce Commission*
Water carriers, Bureau of Internal Revenue, Statistics of
Income, Part 2.
Excludes net income from freight operations of airlines, for
which no data are available* Freight revenue’constitutes a small,
proportion of total airline income*
Hot comparable from year to year because of changes in the number
of companies reporting to the Interstate Commerce Commission*
Includes income from passenger operations* In 1945 passenger
revenue constituted 12 percent of total revenue of carriers
reporting to the Interstate Commerce Commission (Interstate
Commerce Commission, Statistics of Railways in the United States.
1945, »Pable 174)*
Not available«

38 B*

On business costs and competition
1*

Business costs

mke tax tends to increase. busines s costs-seri6Ts.lly but riot uniformly*
Moreover, since it s.pplies to shipments of raw materials as well as
finished goods there is considerable opportunity for pyramiding of the
tax, as goods flow through the various stages of production and distri-*
bution. The varied effects can be considered under two headings:
(a) general effects on the, cost structure of the economy,, (b) effect
on competition among different'users?
•
..a*' Effects'bn cost structure of economy
transportâtion represents an important basic cost in the economy.
Because of the inflexibility of. freight rates,.adjustments in costprice relationships are impeded when economic conditions change* >A tax
on such a rigid cost factor increases the inflexibility of total, costs*
Since the impact of the tsx is very unequal on-different segments of
the economy it tends to stimulate changes which interfere with a
balanced expansion of production.and employment* -The tax has relatively
little direct impact on the finance and service’industries. But by
raising transportation costs it tends to raise the price and discourage
the use of physical plant and equipment compared -with the use of-labors
Since it- tends to limit the market area for a commodity the tax retards
the exploitation of resources and may stimulate uneconomical re-location
of industry* Shifts in industry location require considerable time and
may not take place if the tax is. viewed as.a .temporary .measure*. t However,
where the tax causes a shift the uneconomical location of the plant will
persist even if the tax Is later rqmovedo. .
...
.:;
b.

Competition among diffèrent ugefs .

The tax introduces competitive problems between producers of the
same commodity selling in a,common market since it increases the freight
differential against the producers having the highest rate* S’or
example, if one producer, because of distance or other "factors, has a
$5.00 freight rate while another has a $10,00 rate, ‘the 3 percent tax

204
' '

- 39 -

will raise the differential in shipping charges from $ p.OO:to $ 5 *1 5 «
Although the tax rate is relatively low, a large volume of total
freight is in the form of raw materials where small differences in
costs may determine the source of supply to be used* 1/ Transportation
costs vary widely in relation to the value of products shipped. They
amount to more than half the value of the products at destination in
the case of such heavy commodities as gravel, sand and salt, some
fresh fruits and certain forest products.
The principal products on
which transportation costs were relatively most important in 19^-1, the
latest year available, are shown in Table 5 . Since .that year there
have been substantial changes in rates and in the value of products.
The' ratio is high for most fresh fruits and vegetables because of the
special handling required. Even where the ratio is lower’for a raw
matérial, numerous shipments during the process of conversion to a
finished product may increase the ratio of transportation to total
costs* In such cases as steel products, for* example, the tax operates
in much the same way as a turnover tax and is subject to some of the
objections usually raised to this form of tax. A self-contained
industry which has its own transportation facilities and is not required
to pay the tax because it is a private carrier is placed in an advan­
tageous position compared ’
with competitors that must use public trans­
portation, A mine which must ship its ore by oublic transportation is
placed at a disadvantage compared with one which can process the ore
before shipment.
The. competitive effects will be very uneven for business because
of the wide variations in the importance of transportation costs by
industries and in the location of different firms selling in a common
market*
The ability of shippers to raise their prices by the Amount
of the tax will also vary with the'supply and demand conditions for
their products.
If the demand is very unresponsive, the most distant shippers
may net have to'absorb much of the tax and more favorably located shippers
would tend to receive a windfall, However, even where the tax causes a
1/

1
The importance of variations in' distance between producing areas and
their common markets* has been recognized as a factor in railroad
rate; adjustments*
’’Thus, in 1933 and 193&> when substantial reduc­
tions were made in rates .on citrus fruit, the same reduction was
applied from California, Arizona and Florida, tep preserve the
existing competitive situation by continuing the existing spreads."
(266 Interstate Commerce Commission, 537 » 5^^)

- 40
Table.5
Preigbt revenue and tax on transportation of property
in relation to value at destination for selected
commodities in railroad car lots, on the basis of
freight revenues and values in 1941 l/

Group ' :

Commodity

î

. :Percent freight ¿Effective rate
ïrevenue of value ¿of tax on value
: at destination ; of commodity

All commodities, total
I*

II.

Products of agriculture, total

.18
•31

Grapes, fresh
Oranges and grapefruit
Vegetables, fresh
Potatoes,, other than'sweet
Apples, fresh
Bananas
Barley and Rye
Oats
Corn
Wheat

52.49
40.06
39.13
32.48
25.43
18.61
15.15
13..26
12.85
10.40

1.57
1.20
1.17
.97
*76
.56
.45
.40
.39
.31

Animals and products, total-

3.n

.11

4.69

.14

4.10
4,01

«12
.12

3.93
3,79

.12
< .11

Products of mines, total

29.12 2/

$
|

.87 2/

Salt
Gravel and sand
Stone, broken, ground or
crushed
Asphalt
Bituminous coal

60.97
50.25

1.83
1.51

45,95
35.59
50.94

L.38
1.07
.92 3/

Products of forests, total

12.65

00
to
.

Posts, poles and piling
Pulp wood
Lumber, shingles and lath
Veneer and built-up wood
Box, crate and cooperage
materials

64.06
35.04
18.59
16.0Q

1.92
1.05
.56
.48

14,21

to
*

IV.

Zj

10.25

Presh meats
Cattle and calves, single
deck
Hogs, double deck
Meats, cured, dried or
smoked
Packinghouse products,n.o. s.
III.

6,0

(Continued on next page)

2/

205
, ,

- 41 -

.

. ,4 Table 5.
• Y (concluded)

Group

y

’/ v.

:
:
ï

:.y ...Commodity
“ • ..

percent freight :Effective- rate .
:revenue of value: of lax on'-value
: at destination-: of commodity ;

Manufactures and, miscellaneous.
.'■..total \ ' Y * - /ijfiiiiniiv'i

r,l-i V Jk: Y

1 .14
o
CO

I• • Cement, 'natural and'Portland’
• Fuel, road and petroleum
residual oils ’
Petroleum oils
.Paperboard, pulpboard and
wallboard
Brick, n.o.s. and.building.
.Y .
tile *
’•
. - ■ 4. Scrap iron and scrap steel
Y. 1
, lubricating oils and greases
...Glass: bottles, jars and V
jelly glasses
Cast-iron pipe and fittings
Fertilizers, n.o.s#
Newsprint paper
’
1!
' Iron-pig
•t iron and steel - nails and
> ’}* ,
wire, not woven
Building paper and prepared.
.roofing'materials
•
Iron and steel, rated 5th class
Iron and steel.pipe and
*
fittings . 2
■ * >Y :..Sugar (beet or cone)
Explosives, n.o.s# '
• ' ;‘
Automobiles, passenger
.Iron a n d 1steel, ratöd,6th class
Canned food products
Fur ni tur e, o ther•than me tal

4.66
26.67

0/’
•?Y .
•66

22.06
17.88

*54

13.17

*40 Y,

13.07. / .
11.99
11.77
11.4811.26
10.98 '
10.50
9.97

.39
.36
’ .35

. .

*34
• - .34 ...
■
.33 ...
A .’32
4 .30 '

9.75
9.01
'8.28
|

., '

.,- -

■

'■■'¿29
,/ :;v .27
Y
;•»
.25 f
‘ .* '

8.23 ,
6.45.
6.31
5.75
5.36 .
5.17 ...
5.11-

'

.25 •
.19 * .19
.17
.16
.16
.15

Treasury Department, Division of Tax Research
Source:.. •Interstate Commerce Commission, Freight Revenue and Value of
• '' . Commodities Transported on Class I Steam Railways in the
United States. Calendar Year 1941;' Statement Up* 4329«
1/ Items selected represent the most important items in each. group, in
terms of freight revenue paid, for which the effective rate of the
tax is higher than for the group as a whole*
2/ Excluding coal, which is taxed on the basis of weight.
3/ Computed on the basis of tax of 4^ per ton and a value of $4.35 per
ton at destination#

- 42 shipper to drop out of the market, prices to the buyers of the product
will tend to be increased where the new supply, although it may be closer
to the market, is produced under higher cost conditions* Differences in
industry practices in pricing for transportation will also affect price
adjustments. Where products are shipped f.o.b. prices to buyers would
tend to ¡reflect the tax at once, but where shippers pay the freight a
change in prices charged by them would be necessary to reflect the tax* 1/
3.

Competition in the transportation industry

^he tax increases the differences in-rates charged by different
carriers* While some shippers, such as those of heavy, bulky commodities,
may have no choice of forms of transportation, others may ship by several
different methods. If there is a significant difference in rates between
carriers, the tax'will widen the difference in favor of the lower priced
carriers*
Cenerally water and railroad freight rates are lower than truck
arid express rates*
The competitive position of carriers is also affected by the fact
that the tax is not applicable to certain types of shipments.
Since
transportation by private carriers is' not taxable, some inducement is
offered producers to expand their own shipping facilities up to the point
where such private transportation about equals the cost of taxed public
transportation. Motor and air carriers are likely to be most affected
by this typo of competition for while producers can acquire trucks or
planes they cannot readily build railways or waterways*
C*

Effect on consumers

This tax appears to have a very regressive effect* Although the tax
falls largely on business costs, business will endeavor .to pass it on to
consumers. As indicated in the preceding section, the extent to which the
tax is passed on to them bjr business'users will differ from industry to
industry. It would appear that the tax is more likely to be passed on to
consumers in the case of basic items of consumption for which the demand
tends to be more unresponsive to price increases. Moreover, the tax
probably tends to increase the price of goods more than services* Because
consumers in the lower income groups spend a higher proportion of their
income for goods than services, the tax passed on to consumers is probably
more regressive than total consumer expenditures. In addition, pyramiding
of the tax is more likely than in the case of a tax levied directly on
consumer expenditures*

1J Different types of geographic price structure are discussed in
Temporary National Economic Committee.- Monograph No* 1, “Price
Behavior and Business Policy, n Washington 1940, pp, 273, et, seq*

*:

43 -

Various price indexes will be increased by the tax but because of
its indirect effects it is difficult to estimate the extent of change
involved*
'
VI•

Administration and compliance

It appears that there are approximately 85,000 carriers filing returns
under the tax. Variations in the services rendered by different carriers
create some special problems. The most difficult questions arise in the
treatment of related or Maccessorial" services such as the feeding of stock
and icing of refrigerator cars# Difficult questions also arise as to
whether a firm is engaged in the business of transporting property for
hire, mhe determination of whether a shipment is an export shipment,
and thus exempt from tax, entails additional work for both shippers
and the Bureau of Internal Revenue. The necessity for securing exemp­
tion certificates also imposes a substantial burden on shippers.
Vila

Technical -problems

Most of the problems which give rise to inequities and to diffi­
culties in administration and compliance appear to be inherent in the
imposition of a tax on the transportation of property* Basic changes
in the tax designed to meet these problems would either give rise to
other inequities or increase administrative problems excessively. The
present form of tax in its technical aspects is about as satisfactory
as can be devised.

TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Tuesday, December l6 , 1947. .

Rross Service
No* 8-5^8

The Secretary of the Treasury announced last evening
that the tenders for $1 ,3 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 1 day Treasury hills to be dated December 18, 1947, and to
mature March 18, 1948, which were offered December 12, 1947,
were opened at the Federal Reserve Banks on December-15.
The details of this issue are as follows:
Total applied for * $1,759,239,000
Total accepted
- 1,301,989,000 (includes $38,126,000 entered
on a non-competitive basis and accepted
in full at the average price shown
below)
Average price - 9 9 . 7 6 0 Equiv. rate of discount approx* 0.949$
per annum
Range of accepted competitive bids:
High » 99o790 Equiv. rate of discount approx. 0,831$ P©p annum
Low - 99.759
M
"
"
"'
"
0,953$ "
( 4 5 percent of the amount bid for at the low price was accepted)

Federal Reserve
District

Total
Applied for

Total
Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St..Louis
Minneapolis
Kansas City
Dallas
San Francisco

$

$

1,513,000
1,608,804,000
1 ,615,000
5.875.000
4.407.000
2 .2 5 0 . 0 0 0
6 9 ,2 7 9 , 0 0 0

.

3 615.000
2 ,8 2 0 , 0 0 0

5.435.000
4.407.000
2.250.000

3 5 ,6 1 8 , 0 0 0
3,615,000
2 ,8 2 0 , 0 0 0

27,457,000

14.235.000
1 7 '104,000
2 5 .0 8 2 . 0 0 0

$1,759,239,000

$1 ,3 0 1 ,9 8 9 , 0 0 0

14.235.000

.

17 369.000

TOTAL

1,472,000

1 ,1 8 8 ,3 3 6 , 0 0 0
1 ,6 1 5 , 0 0 0

0 O0

TREASURY DEPARTMENT
Washington
FOR RELEASE, HORNING NEWSPAPERS,

Press Service

Friday, December 19, 1914-7«

No. S-569

Secretary of the Treasury Snyder today announced the offering, through
the Federal Reserve Banks, of 1-1/8*percent Treasury Certificates of In­
debtedness of Series A-19U9* open on an exchange basis, par for par, to
holders of Treasury Certificates of Indebtedness of Series A-19U3, in the
amount of $3,13U,197,000, which will mature on January 1, 19U8. Cash sub­
scriptions will not be received.
The certificates now offered will be dated January 1, 19U8, and will
bear interest from that date at the rate of one and one-eighth percent per
annum, payable with the principal at maturity on January 1, 19h9. They
will be issued in bearer form only, in denominations of $1,000, $ 5 *0 0 0 ,
$10,000, $100,000 and $1,000,000.
Pursuant to the provisions of the Public Debt Act of 1914-1, as amended,
interest upon the certificates now offered shall not have any exemption,
as such, under the Internal Revenue Code, or laws amendatory or supplementary
thereto. The full provisions relating to taxability are set forth in the
official circular released today.
Subscriptions will be received at the Federal Reserve Banks and Branches
and at the Treasury Department, Washington, and should be accompanied by a
like face amount of the maturing certificates. Subject to the usual reserva­
tions, all subscriptions will be allotted in full.
The subscription books will close for the receipt of all subscriptions
at the close of business Tuesday, December 23.
Subscriptions addressed to a Federal Reserve Bank or Branch or to the
Treasury Department, and placed in the mail before midnight December 23,
will be considered as having been entered before the close of the subscrip­
tion books.
The text of the official circular follows,;

20 9
UNITED STATES OE AMERICA
1-1/8 PERCENT TREASURY CERTIFICATES OF INDEBTEDNESS OF SERIES A - 1949
Due January 1, 1949

Dated and "bearing interest from January 1, 1948

1947
Department Circular No. 821

TREASURY DEPARTMENT,
Office of the Secretary,
Washington, December 19, 1947.

Fiscal Service
Bureau of the Public Debt
I,

OFFERING OF CERTIFICATES

1. The Secretary of the Treasury,, pursuant to the authority ef the Second
Liberty Bond Act, as amended, invites subscriptions, at par, from the people of
the United States, for certificates of indebtedness ©f the United States, desig­
nated 1-1/8 percent Treasury Certificates of Indebtedness of Series A-1949, in
exchange for Treasury Certificates of Indebtedness of Series A-1948, maturing
January 1, 1948.
II.

DESCRIPTION OF CERTIFICATES

1. The certificates will be dated January 1, 1948, and will.bear interest
from that date at the rate of 1-1/8 percent per annum, payable with the principal
at maturity on January 1, 1949. They will not be subject to call for redemption
prior to maturity.
2. The income derived from the certificates shall be subject to all taxes
now or hereafter imposed under the Internal Revenue Code, or laws amendatory or
supplementary thereto. The certificates shall be subject to estate, "inheritance,
gift or other excise taxes, whether Federal or State, but shall be exempt fr®m
all taxation now or hereafter imposed on the principal or interest thereof by
any State, or any of the possessions of the United States, or by any local taxing
authority.
3. The certificates will be acceptable to secure deposits of public moneys.
They will not be acceptable in payment of taxes.
4. Bearer certificates will be issued in denominations of $1,000, $5,000,
$10,000, $100,000 and $1,000,0Q9. The certificates will not be issued in regis­
tered form.
5. The certificates will be subject to the general regulations ®f the
Treasury Department, now or hereafter prescribed, governing United States
certificates.
III.

SUBSCRIPTION AND ALLOTMENT

1. Subscriptions will be received at the Federal Reserve B^nks and Branches
^nd at the Treasury Department, Washington. Banking institutions generally may

2 1 0
-

2

-

submit subscriptions for account of customers, but only the Federal Reserve Banks
and the Treasury Department are authorized to act as official agencies.
2. The Secretary of the Treasury reserves the right.to reject any subscrip­
tion, in whole or in part, to allot less than the amount of certificates applied
for, and to close the books as to any or all subscriptions at any time without
notice;' and any action he may take in- these respects shall be final. Subject to
these reservations, all subscriptions will be allotted in full. Allotment notices
will be sent out promptly upon allotment,
IV.

PAYMENT

1. Payment at par for certificates allotted hereunder must be made on or
before January 2, 1948, or on later allotment, and may be made only in Treasury
Certificates of Indebtedness of Series A*1948, maturing January 1, 1948, which
will be accepted at par, and should accompany the subscription. The full year’s
interest on the certificates surrendered will be paid to the subscriber follow­
ing acceptance of the certificates.
V.

GENERAL PROVISIONS

1. As fiscal agents of the United States, Federal Reserve Banks are author­
ized and requested to receive subscriptions, to make allotments on the basis and
up tq the amounts indicated by the Secretary of the Treasury to the Federal Re­
serve Banks of the respective Districts, to issue allotment notices, to receive
payment for certificates allotted, to make delivery of certificates ®n full-paid
subscriptions allotted, and they may issue interim receipts pending delivery of
the definitive certificates.
2. The Secretary of the Treasury may at any time, or from time to time,
prescribe supplemental or amendatory rules and regulations governing the offer­
ing, which will be communicated promptly to the Federal Reserve Banks.

JOHN W. SNYDER',
Secretary of the Treasury.

T
LH*

TREA è t I # ;DEPkRTHl^W
'

.

■•

.1

.

,I,-

,

■ •

Washington ■: .

POR RELEASE',' I-iORI'TING. ifeiSPAPERSj
'\
Friday, December;-Ì9;..‘19*17'.
• •

A T' *
.

P^ess Service (
Ho .AS-570 >r v' ,

The Secretary of >the Treasury, by.this public not ice',/ (' ;
invites tenders for; $1 ?1 0 0 .,0 0 0 ,0 0 0 , or thereabouts^' of ’9 0 ^'day ; .
Treasury bills; foh' cas&ihd ih exchange for-Treasury, .bills:-ri :V
maturing December 26, •1977, to be issued 'oh1a discount basi
under competitive-and» noh-competitive bidding as hereinafter ;
provided. /The bills ^pf this series vili bé dated December. 2.6,- .
197-7, and vill 'fnature:ìiarch 2 5 ] 1 9 1 8 ,:when the,tace.;amoiuit•will
be payable vithoutiinterest
they will pe 'issued .
:in bearer
.
form only; and in denominations Of |l,0 0 Ö ) ' $IO;OÒO,ÌA
$1 0 0 ,0 0 0 ,,4 5 0 0 ,0 0 0 , and $1 ,0 0 0 , 0 0 0 maturity; value.),..:' ;
Tenders will be 'received at Federal rReserve Banks -and 7
Branches up to the closing" hour, two o 1clock' p .m>,. Eastern
Standard time, Ilonday, December'22, 1 9 77. .Tenders ’will not ?be
received at the Treasury Department,. Vfashihgton.• Ê /ch tender
must be for an even multiple of $1 ,0 0 0 , ahd in the ,case; of' ■
competitive tenders the price offered must be expressed <on> the 3
basis of 1 0 0 , with not more than three decimals, e . g ., 9 9 *925.
Fractions may not be used. It is urged that tenders be made•’
on the printed forms and forwarded in the special envelopes
which will be supplied by Federal Reserve Banks or Branches on
application therefor.
7 .
Tenders will be received without deposit from incorporated'
banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders from others must be
accompanied by payment of 2 percent of the face amount of Treasury
bills applied for, unless the tenders arc accompanied by.an '
express guaranty of* payment by an incorporated bank or trust V
company.
'
*
-.
*
Immediately after the closing hour, tenders trill be opened
at the Federal Reserve Banks and Branches, following trhich
public announcement will be made by the Secretary of the Treasury
of the amount and price range of accepted bids ^ Those submitting
tenders will be advised of the acceptance or rejection thereof.
The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and
his action in any such respect shall be final. Subject to
these reservations, non-competitive tenders for $2 0 0 , 0 0 0 or
less without stated price from any one bidder will be accepted
in full s,t the average price (in three decimals) of accepted
competitive bids. Settlement for accepted tenders in accordance
with the bids must be made or completed at the Federal Reserve
Bank on December 26, 197-7* in cash or other immediately available
funds or in a like face amount of Treasury bills maturing

-

2

-

December 26, 19^7 * Cash and exchange tenders will receive equal
treatment. Cash adjustments will be made for differences
between the par value of maturing bills'"accepted in. exchange and
the issue price of the new -bills.
>
■
• -,
VThe income derived from Treasury bills, whether interest
or gain from the sale or other disposition of the bills, sho.ll
hot .
‘have shy exemption, às Such, and loss.from the sale or
other disposition of Treasury bills shall not have any special
treatment, as such, under the Internal Revenue Code, or laws
amendatory or supplementary thereto,* .The bills shall be subject
to estate; inheritance, gift or other excise taxes, whether
Federal or State, but shall be exempt from all taxation now or
hereafter imposed on the principal or interest thereof by any
State, or apy of the possessions of the United States, or by any
local, taxing authority. For purposes of taxation the. amount
of discount at which Treasury bills are originally sold by the
United States- shall be considered to be interest; Under Sections
b 2
and 117 (a) (1) of the Internal Revenue Code, as amended
by Section 115 Of the Revenue Act of 19^2, the amount of discount
at which bills issued hereunder are sold shall not be considered
to accrue until such bills shall be sold, redeemed or otherwise
disposed of, and such bills are excluded frpM consideration as
capital assets ; Accordingly, the owner of Treasury bills (other
than life insurance companies) issued hereunder need include
•in his income:, tax return only the difference’between the price
paid for such bills, whether on original -issue or oh subsequent
purchase, and the amount actually •received either upon sale or
redemption at maturity-during the taxable year for which the
return is made, as ordinary gain or loss.
•
• '•:;Treasury .Department Circular Ilo. ^18, as & mended, and this
notice, prescribe the terms of the Treasury "hills and govern the
conditions of;their issue. Copies of the circular may be
obtained from any Federal Reserve Bank or Branch,

oQo

TREASURY DEPARTMENT

212

Washington

FOR IMMEDIATE RELEASE,
Tuesday« December 23« 19¿7»

Press Service

President Truman has conferred on Clifton E» Mack, Director of the
Treasury1s Bureau of Federal Supply, the Medal of Merit for exceptional
service to the Government during the war#
Presentation of the award was made today in a surprise ceremony at
the Bureau of Federal Supply Offices by Edward H# Foley, Jr., Assistant
Secretary of the Treasury.
Crediting Mr. Mack with, ’’aggressive leadership” in directing
procurement activities of vitally needed goods, the citation said that
Mr# Mack's efforts were responsible for rushing the much needed items to
our own armed forces and which "turned out to be of such great help in
driving the enemy out of Casserine Pass in Africa and into the sea#
With the passage of the Lend-Lease Act in March of 194l> the Bureau
of Federal Supply, then known as the Procurement Division, undertook
the immediate purchase of fire fighting equipment to save London from the
impending blitz. Xt sought raw industrial materials, such as steel,
lumber, chemicals, hand tools and heavy industrial machinery*
The Bureau,
under Mr. Mack's direction, became one of the major purchasing organizations
in the war structure, buying nearly S billion dollars worth of chemicals,
metals, vehicles and nearly 50,000 other items. Included in the vast
operation were purchases of such things as aluminum rolling mills, entire
railroads, a tire manufacturing plant, refining equipment and many others.
During the war, Mr. Mack was named by former Secretary Henry^
Morgenthau, Jr., to be the Treasury Member of the Procurement Policy
Committee which, under the chairmanship of Donald M. Nelson, advised the
President on purchase policies#
In addition, Mr# Mack was instrumental in calling into the Federal
service outstanding industrial purchasing agents to help the mammoth
procurement program then under way#
A career civil servant,'Mr. Mack entered the Government in 1927
as a member of the Treasury's Intelligence Unit, Bureau of Internal
Revenue* He rose rapidly to the post of Special Agent in Charge of
the New England Division# In 194-0 he conducted a special survey of the
Procurement
Division's purchasing activities and then became Director
cf the organization#
A combat pilot in the First World War, Mr. Mack is also a graduate
of the'Suffolk Law School in Boston, Massachusetts# He is responsible
for the national supply system now operating within Government, whereby

213

-

2

-

' .
affpnHpq
the Federal establishment are supplied with items
civilian agencies o.~
strategically placed Treasury warehouses,
they commonly use from 12 strategically piaoo
,,
« v ^ « „ Member of the National Association of Purchasing
■
7+«t "«hd a nast&Pv'°STdent of the Washington Chapter of that
S ^ o i ' a e more"recently has, in
Institute of Go.emm.en£1 h r r c h a ^ g , laxd p l ^ s i p o r t l y
ù

^motion

^ in^States,
^ Counties
eS ^ and
r rmunicipalities»
° S i S r
to n
officials

8ing infor-

The citation accompanying The Medal for Merit follows.
CLIFTON E. MACK, for exceptionally meritorious
conduct in the performance of outstanding services to the
United States from March 25, 1941 to December 3 1 , 9 4
ttr Mack, as Director of treasury Procurement, lcter the
t o e a u of Federal Supply, through his inspiration?!
leadership and guidance, rallied his various o f f « * * ,
aides, purchasing agents and all Pr<:curemsnt w g k in Washington, and in all hegion.a;
the United States, in the purchase and
shipment of war and other essential supplaesj-or our
Allies and our armed forces. By his brilliant xores.gho,
initiative, and great ability, he played an outstanding
part in p r o v S i n f all Allied armed forces withnecessary
war materials and equipment as quickly € P
much
Under his aggressive leadership and diligen
i

“

I r :;

out of Casserine Pass in Africa and in
1/+
Mr. Mack's achievements and firre executive ability,
together with his patriotic devotion to duty reflect tn
highest credit upon him and the Government of tin
United States.

-oQo~

214

TREASURY DEPARTMENT
Washin gton

Press Service
No*,. S-572

FOR IMMEDIATE.RELEASE,
Monday, December 22, 1917

Six Bureau of Engraving and Printing employees today received money awards totaling $530 under t h e .Treasury Department's "Cash Awards for
Suggestions Program*"

The six contributed ideas for the betteimont ox

essential work in the Bureau of Engraving and Printing which will save
the Government many thousands of dollars annually#
Recipients of the awards are:
John J. Carow, Plate Printing Division, $>10*
Clifford E. Cole, Surface Printing Division, $>375*
Charles H* Kissner, Surface Printing Division, $50*
Ernest Sizemore, Surface

Printing

Division, $>75*

Mrs# Helen Bu Tanner, Plate Printing Division, $10#
Ralph.E* Tayne, Construction and Maintenance Division, $10*
The %375 award to Clifford Cole was for a suggestion that a reduced
size of paper be used in the production of internal revenue stamps for
cigarettes*' Cole’s idea will lead to a saving estimated at &30>000 a year.
Recommendations for the six awards originated in the Bureau of
Engraving and Printing and received approval of the Departmental Committee
on Employee Awards*
Presentations were made at lunch time today by the superintendents
under whom the employees work*

~o—
\

Jtj.

215
TREASURY DEPARTMENT
Bureau of Internal Revenue
Washington
FOR RELEASE; MORNING NEWSPAPERS
Wednesday, December 24, 1947

Press Service
No« S~573

George J* Schoeneman, Commissioner of Internal Revenue, announced today
plans for authorizing department stores and other qualified retailers to
use the last-in-first-out (commonly called LIFO) method of valuing
inventories for income tax purposes*
The first step was the publication today in the Federal Register of a
proposed amendment to the income tax regulations which would authorize
retailers to use this method, provided they use sound statistical procedures
in operating the LIFO method*
In adopting this policy, the Commissioner
gave consideration to the principles stated by the Tax Court in the case of
Hutzler Brothers Company vs# Commissioner
T*C© No# 3)* In this case the
Court expressed the belief that the LIFO inventory method could be adapted
to retail business provided suitable statistical procedures were used*
To provide a suitable basis for the retail use of the. LIFO method,
representatives of the Bureau of Internal Revenue, the Bureau of L&bor
Statistics of the Department of Labor, and representatives of retail
organizations have arranged for the compilation of price indices* The Bureau
of Labor Statistics will compile and publish the statistics, the-retailers
will bear the cost of the statistical work, and the Bureau of Internal Revenue
will accept these indices as a suitable basis for the use of the LIFO
inventory method by retailers©
Under the administrative procedures act, the proposed regulation, as
published in today1s Federal Register, will be held open for 30 days in
order to give interested retailers and others an opportunity to submit
comments and suggestions which will be given consideration before the final
promulgation of the amended regulation*
Such comments and suggestions should
be submitted in duplicate to the Commissioner of Internal Revenue,
Washington, D* C*
In order to assist interested persons in understanding the methods and
principles involved in the proposed regulation, there is attached a
memorandum which, subject to modification on the basis of comments received
from interested parties within the next 30 days, is intended to be the basis
for an official mimeograph defining the use of the LIFO method by retailers*

- 0 ~

Use of LIFO Inventory Method "by
Taxpayers Also Using R e W i l > - • '
Inventory -Method* v/-'-7T‘ "

.
^

.

^4.y
'
; '

Section 22(d)(1) of the Internal Revenue Code provides an
elective method for inventorying goods commonly referred to as the
last-in-first-out, o r ’-LIFO, inventory method. Section 2£(d)(2)(A)
of the Code provides Vthat 'the elective method, shall he applied only ,.,
with respect to 'the goods specified by the taxpayer in an a p p l i e d .
tion filed-with the Commissioner.' 'The Cottíihiásloner1s regulations
with respect, to the elective:inventory method have heretofore made
no provision for retailers to group s'uch 'goods into classes.
The
.
Bureau' has -held that the u s e ;of the elective inventory method was
not available to taxpayers whose inventory records are kept on the .
basis of the retail: inventory method permitted under section 29*22.(c)-S>.
of Regulations :111-and section 19.22 (c)~S of Regulations 103. .

.

The. decision of The Tax Court in the case of Hutzler Brothers %
Gompany, & T.:G. Ho. 3» hold that the position of the Commissioner was
untenable i n prohibiting the use of the elective inventory method by ¿
.V
a taxpayer also using the retail inventory method. . The grouping :
1
of goods by classes under the retail inventory method necessarily
involves the use of some type of index numbers for measuring the
extent
price changes in the various classes of goods ,
c oncerned^
The decision laid down no rule concerning the nature or type of index
numbers which-might bo.proper, nor did it proscribe other detail's o f 1 V mothpds.:for applying the LI-FO method in the .case of retail merchants/:
fte-íprbpbsed -Treasury- Decision published today in .the Federal >■ i%
Register proposes to amend Regulations Í03 and 111 to oxpres:sly .permit'I
the use of the elective inventory method by taxpayers also using the
retail inventory method.
Certain principies are laid down fbr the
applicátion ;Of'the-elective inventory method by such taxpayers. • First,'
since t b e Voleetivemethod requires' cost, the retail .selling prices of
goods included in the opening inventory and purchased during the year
must be-adjusted for mark-downs as well as mark-ups during t h e year with­
out regard to tho* taxpayerls previous practice with respect to mark-downs
under the retail method.' Second, the price indices, employed in the adjustment
of the apparent; cost of goods in the^ciosihg inventory, for price changes
taking place during the5:year -m u w be showir^tb the satisfaction of the
Commissioner to be acceptable. Any price indices must be based upon sound
statistical principles of construction and upon adequate records, available
for examination by. the.Bureau.
V
-

(over)

r-^ 'j:. oinv <
Use of LIFO InventoryLMe^hod: by'-i,^ ¿A
Taxpayers also using re tailAi:
h ^®n t^*30
method

*j£ . ;:■•v .

-C

~\ 'n>~..]...:•: ''

Arrangoisents:ho#o teen na$e' between rbpresEnta-ti,ves.. ofVthe rw- .■
tail tbade-ohd the United Status iBaroau/of Later Statistics for that
agency^to- comput C 1tad 'publish a‘ sofies of group index numbers n f ■
retail prices, oh a'CountEy-widC basis, suitable. for une;by individ-; ,
ual department stores,v whiefa. Vilt'te/acceptable, to the Commissioner, ,
These index numbers will cover .the period from 191» to -the present
on a semi-annual basis, a n d w i l l appear semi-annually.in
e
The use of such indices' of the Bureau of Labor Statistics Is not
.•
mandatory; indices may be prepared by an. Individual
.
unon his own data on prices -and inventory quantities, if adequate,
_
and if proof is shown that sound statistical methods have been employed
that assure reliable indices, not only in tho year .in queatACn. but
in future years; Retailers who have filed, on.the basis of
'
method, returns for past years which are still open, an w. .
•
dices that arc not acceptable t o .the .Commissioner, may file snippi-ed . .•
returns employing acceptable indices.

*

'

....

It is expected that the Bureau of Labor Statistics will
lish its'group indices for department stores for the years 1940 to
19 ^-7 , inclusive*' on or about December 31» 19^7» and the semi-emnu
indices for January 15 and July 15 thereafter on^or about March, 1_ ^
and September 1, respectively, of each year.
Indices as of th 1?
of a month will be deemed 'to-:be'representative of prices .at-either
the beginning or end of the month in-question.
Th 6 following groups are under consideration .by the Bureau
• •
of Labor Statistics as ttio-tentative basis for the preparation-of .
the proposed indices for’past years for use by department stores-;
(1)
(2 )
(3 )
(U)
(5 )

(6) ''-Women!s Underwear
Pi 6 ce Goods '
1
(
7} •...Women* s .'Outerwear
Domestics and Linens "
(g) .Men *s" Wear \ •;
Shoes
';
^
( 9 ) Housefurnishings
Dfugs aiidJToilet'Articles
(10) Appliances r .
Women1s Accessories
(11) Miscellaneous

Beginning with January 191+8 price data will bo gathered.on addi­
tional commodities that may allow the segregation of additional
groups*
In using such group indices, a department store taxpayer
will apply to the inventory data for each of his departments
separately, in the manner described below, the index for the group
in which the department logically belongs, A given group index may
be applicable to a number of departments in a given store.

- 3Use of LIFO Inventory Method "by
Taxpayers also using retail inventory
method

' T h e ;method of making the price adjustments to the closing^
inventory values under the retail inventory method, combined with
the elective (LIE.O) method, is illustrated in Exhibits A and B
attached, for three hypothetical-departments#
In the first two
departments there was an increase in the physical quantity of ii>ventory during the year in question, as shown by the comparison
of the adjusted retail value at the end of the year and the retail
value at the beginning of tho year.; In the. first department prices
rose during the year, as shown by the index, while in the second,
prices-fell.
In .’the third department there was a decline in the
physical quantity of inventory.

These Illustrations are intended to show the' main principles
involved in the LIFO adjustments to retail inventories, and are not
intended to cover all accounting details of computations which may
be required, particularly in later years, under the elective method#

217

Exhibit A
Method of Computing LIFO, Retail Inventory

Department Ho*

1
Step No*

Item or Computation

1»

1«
2*
3.

7*

II

8*

2

3

Men’ s
Furnishings Linens

Data from taxpayer*s hooks?

Opening inventory - retail value
n
.1
- mark-on percent
w
«;
;- cost (l reduced hy 2 )
Mark-on on year’s purchases (see step 12a) ■
Closing inventory - retail value
n
**
*• mark-on percent
«
»
- cost (FIFO) (5 reduced
•
.u
■• '
: "by 6 ) ;

h*
5«
6*

Women*s
■Shoes

$2 5 ,0 0 0
h3*6$
$ih,ioo
i&*7$
$3 6 ,0 0 0
hH*i$

$10,000
$1(0 ,0 0 0
•
1+1+.1 $
1*5,2#
$2 1 ,9 2 0 "■ $ 5,590
1(1*. 8#
$10,1400
$39,1(00
1414. 14$
1(1*. 9#

$2 0 ,0 1 6 ;: $2 1 ,7 0 9

$ 5,7^2

• Price Index Data:

Price index, closing date relative to
opening date

9 6 . 3#

113,7$

$ 9 - 1 H7

i+,922

$140,91 *+
9lU
880
U86

19,022

2 2 ,1+06

108*U$

III* LIFO Computations?
9#

Closing inventory - adjusted retail value

(5 * S)
10.
11.
I2a*
12b.
13.

Increase (decrease) in year (9 - l)
Increase at current prices (10 x 8 )
Cost of increase (11 reduced hy h)
Cost of decrease (10 reduced hy 2)
LIFO closing inventory (3 + 12a or 3 -* 12b)

$33,210

8 ,2 1 0
8 ,9 0 0

(853)
-

(1*77)
5,H3_

Notes? -(a) The mark-ons in steps 2 and h must he computed taking account of
mark-downs as well as mark-ups*
(h) In succeeding years the data to he used in step 3 will reflect
the amounts shown for the preceding year in stops 3 and 12 rather than
being computed from steps 1 and 2*
(c) Steps 6 and 7 are shown to allow comparison of LIFO and FIFO
inventories*
"(d) The index in step 8 is the index of retail prices applicable to
the goods in each department, showing the level of prices at the
end of the year (108#1$ in department l) relative to the beginning
of the year (100$)•

5

218
Exhibit B.
Dept. I.
Thousands
of d o lla rs

Method of Computing LIFO, Retail Inventory.
Increase

TREASURE DEPARTMENT

219

Washington
Ph ir»

OR RELEASE, MORNING NEWSPAPERS
uesday, December 23, 1947«

Press Service
• s~

The Secretary of the Treasury announced last evening
that the tenders for $1 ,1 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 0 -day
Treasury bills to be dated December 26, 1947, a^d to mature
March 25« 1948, which were offered December 19, 1947, were
opened at the Federal Reserve Banks on December 22.
The details of this issue are as follows:
Total applied for
Total accepted

$1,397,460,000
1 ,1 0 1 ,6 2 0 , 0 0 0 (includes $3 6 ,2 7 2 , 0 0 0 entered
on a non-competitive basis and accepted in
•
ull
at
the
average
price
shown
below)
I u

Average price — 99*782 Equiv, rate of discount approx. 0.951/^
per annum
Range of accepted competitive bids*.
High - 9 9 . 8 0 0 Equiv. rate of discount
Low - 99.761
"
”
"

0 . 8 0 0 ^?

per annum

0.956^

( 6 5 percent of the amount bid for at the low price was accepted)

Federal Reserve
District

Total
Applied for

Total
Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
6 ,2 9 1 , 0 0 0
1,263,420,000
1.870.000
2 .0 5 8 . 0 0 0

$

TOTAL

6,311,000

1.575.000
6 2 .9 9 6 . 0 0 0

3.415.000
3.240.000
6.100.000

5 ,7 0 9 , 0 0 0
3 4 .4 7 5 . 0 0 0

$1,397,460,000
cOo

6,046,000
985 ,320,000
1.870.000
2.058.000

5 .1 1 1 . 0 0 0
1 .5 5 0 . 0 0 0

49.036.000
3.415.000
2.740.000
4.900.000
5.099.000
34.475.000
$1 ,1 0 1 ,6 2 0 , 0 0 0

TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING.NEWSPAPERS, :
'Friday, ,December 26,.1947> . '

Press Service
No. S-575

The Secretary of the Treasury, by this public notice,
invites tenders for $1 ,3 0 0 ,0 0 0 ,0 0 0 , or thereabouts, of 9 0 -day
Treasury bills, for cash and in exchange for- Treasury bills
maturing January 2, 1948, to be issued' on a discount basis
under competitive and non-competitive' bidding as hereinafter
provided-. The bills of this series will be dated-■January 2 ,
19.48, and. will mature April 1, 1948, when the face amount will
be -payable without interest. They will be issued in bearer
form only, and in denominations of $1 ,0 0 0 , $5 ,0 0 0 , $1 0 ,0 0 0 ,
$1 0 0 ,0 0 0 , $5 0 0 ,0 0 0 , and $1 ,0 0 0 , 0 0 0 (maturity value),
.Tenders will be received at Federal Reserve Banks and
Branches up to the closing hour, two o'clock p,.m.> Eastern
Standard time, Monday December 29, 1947.. Tenders will not be
received.at the Treasury Department, Washington, Each tender
must be for an even multiple of $1 ,0 0 0 , and in the case of com­
petitive tenders the price offered must be expressed on the
basis of 1 0 0 , with, not more than three decimals, e. g,, 9 9 .9 2 5 ,
Fractions may not be used-. It is- urged that tenders be made
on the printed forms and forwarded in the special envelopes
which will be supplied by Federal Reserve Banks or Branches on
application therefor-.
Tenders will be received without deposit-.from incorporated
banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders from others must
be accompanied by payment of 2 percent of the face amount of
Treasury bills applied for, unless the tenders, are accompanied
by an express guaranty of payment by an incorporated bank or
trust company.
. ;a
:
..£•
Immediately after the closing hour, tenders will be opened
at the Federal Reserve Banks and Branches, following which
public announcement will he made by the Secretary of the
Treasury of the amount and price range of accepted bids, Those
submitting tenders will be advised of the acceptance or rejec­
tion thereof. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders,, in whole or
in part, and his action in any such respect shall be final.
Subject to these reservations, non-competitive tenders for
$2 0 0 , 0 0 0 or less without stated price from any one bidder will
be accepted in full at the average price (in three decimals)
of accepted competitive bids. Settlement for accepted tenders
in accordance with the-bids must be made or completed at the
Federal Reserve Bank on January 2, 1948,'in cash or other

immediately available funds or in.'allike face amount of
Treasury bills maturing January 2, 1948. Casb and exchange
tenders will receive equal treatment. Cash..adjustments vili
be ipade for differences betveen .the par value of maturing"'; , . ;
bills accepted in exchange and thè -Issué'^price- of-the;n@^l:biils’.
... The income derived from. Treasury bills,, vhether interest
or gain -from- the sale, or other;disposition. of tile, bills, shall
not- have: any exemption, às. such, a n d ‘
loss .from the sale; or
other disposition of Treasury; bills shall, not have' any special 7
treatment-^: as-such,. under the Infernal .Revenue-C’
ode, or lavs
amendatory or supplementary thereto ¡*’ The bills -shall be ;
•subject-to estate,/inheritance,:- gift, or other excise' taxes, '
vhether Federal or State:-, .but shall. .be; exempt ifr.om .all taxation,
nov or hereafter imposed on the •principal or interest, ■thereof
by any State, or any o.f the possessions of theMJnited. -States, ,
or by any local taxing authority. For purposes of‘taxation
the amount of discount at vhich Treasury bills are.originally
sold by.; the United States shall be considered; to be interest..
Under Sept ions, 42 and .117 (a); (!) of. the Internal Revenue '
Code, asamended, by*Section 115 of the -Revenue Act. of 1941,
-the amount -of ^discount at vhich bills issued hereunder are' 'sold
shall not.be considered to accrue'until such bills shall be
sold, redeemed or otherwise disposed of > and such.bills are
•
excluded from consideration as capital.assets. Accordingly,’
the ovnpr’of.Treasury bills (,other- than life" insurance^ companies
issued hereunder need ;include in his income .tax return; only
;
the .difference Tpetveen the price paid for such■bilIs, vhe'ther
on original issue or on subsequent purchase;, and thè amount
actually received either.upon sale or redemption at maturity
during the taxable, year for vhich•the return is made, as
ordinary gain, or loss.
t 4* ;
' ,r>
,«
■
^Treasury Department Circular No'. 4l8, as amended, and this
notice,..;prescribe the-terms of .the .Treasury bills and* govern
the conditions of their issue , Copies of the circular may be .r
obtained'from any Federal Reserve Bank or Branch. ; ç.

221
TREASURE DEPARTMENT
Washington

FOR IMMEDIATE RELEASE
■Wednesday, December 2 4 , 1947

Press Service
N o 0 S-576

On October 16 and 17, 1947, a conference was held at the Bureau
of Customs regarding the classification of Cordova wool for tariff
purposes©

The Bureau has affirmed that the Cordova wool provided

for in paragraph 1101(a), Tariff Act of 1930, as amended, is the same
as that designated as Cordova in corresponding -pro'visions of previous
tariff acts©

This type of wool is represented try official sample 301©

It is anticipated that this ruling will remove uncertainty in
the trade as to the character of woof classifiable as Cordova and
entitled to entry under bond without payment *of duty for use in the
manufacture of carpets and other articles enumerated in paragraph

1101 (b) of the tariff act 0
\

222

TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE,
Friday, December 2 6 . 194 .
7.

Press Service
No. S-577

i«IbS,?,'£°y?m
paSf| SS«th
Ii*a8iuA eii«
in accordanfP vifh a c ^ n
i determined from year

the m i « v S g ° s t 2 ?ement:^

to year

proclamation> ^he Secretary issued

ftecembpr^ia
l t 0 0 ^ 6
determined Under T.D. 5595
December 1 9 , 1 9 4 7 to bemused by life insurance c f m m S N t ,
taSbL^learlQ^rirTn ^
Oth0J
tions in excess of the net investmeAinfmefn l i f 5 n * A « dU°*
relievinc
not only have the???ect S f ^ n l i m y 1^ 06
respect fo^ t i l l ? "ii?finsu?ancfiAf t m e n f f * 1 lnC£ m6
wlth
also exempt them in considerable £Irt ?ro£ S f o ^ i n v e o S ,

p S A 'ro fir w i^ S iiss“^«;8^ ;

1 ^ 7

bf accident
and1047
heSt^inLrrace^hSfi^ess^liif
7 lars®
v'0lUme
income
tax for
^
business, will 1 pay
any Federal
+Miio 4 ~ .O' . 1 0 '1
' *
inis development raises oupatinn«?
£
.
policy with respect to the method of t°xlnc? i-ifo *
companies vhlch call f o r thp
\ ? X
^ f x l n S
life insurance
and others concerned
L ^ A ^ a f
the c^ g r e SS
industry at their feAest
I of the life insurance
Treasury ¿ t h S j o S S ^ * i K % § & 5 £ .
"
Wlth the
the provisionsrof'lSectJon 2 0 ? (LAcfthflSte ln accordance with
as amended by Section 163 o f the Revenue t f * ? % ^ § Venu® Code>
basis of representative data furnished L i A
A 9 o n the
19“n f L ^ l f ^ p 4 l r e o n s i St-enr*itC^ l9^ ’ ^ f f i g u r e for
^av, I have no alternative hnt fn
*93. Under the
ever, the unevoiiawfrelult L the
suoh * « * > « » < HowPederal income tax
liability
f
A
m
lAe
?
removal
of
A 4-j.d.Dxiity irom life insurance
companies.

"The present taxing formula applicable to life insurance
companies is based on conditions existing at the time of its
adoption in 1942. I am confident that the life insurance
industry will cooperate with the Treasury and the Congress in
developing revised methods of taxation that will be fair and
equitable and will not endanger their obligations to their
policyholders.M

224
TREASURY DEPARTMENT
Washington

FOR IMMEDIATE RELEASE
Friday, December 26, 19^7. |

Press Service
No * S-578
, ,|

1r ||| <'|>/.,1 l
}*J&''

Secretary Snyder today issued the following statement:
The story in reference to Treasury
recommendations on tax reduction which appeared
in today's afternoon papers is the figment of
an active imagination.
The Treasury Department has reached no
conclusions on recommendations to the President
on tax matters,

oOo

t

225
TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Tuesday, December 30, 1947c

v

Press Service
No. S- 5 7 9

The Secretary of the Treasury announced last-evening that the
tenders for $1,300,000,000, or thereabouts, of 90-day Treasury bills
to be dated January 2 and to mature April 1, 1948, which were offered
December 26, 1947, were opened at the Federal Reserve Banks on
December 2 9 .
'The details of this issue are as follows:
Total applied for » $1,635,902,000
Total accepted
- 1,303^405,000 (includes $30,376,000 entered on a
' non-competitive basis and accepted in full at
the average price shown below)
Average price

- 9 9 . 7 6 2 Equiv. rate of discount approx. 0.952$
per annum

Range of accepted competitive bids;
High = 99.770 Equiv. rate of discount 0.920$ per annum
Low - 99".761
"
"
"
”
0 .956 $ "
"
(6 l percent of the amount bid for at the low price was accepted)
Federal Reserve
District

Total
Applied for

Total
Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St,, Louis
Minneapolis
Kansas City
Balias
San Francisco

$ ‘ 2 ,0 0 5 , 0 0 0
1,477,943,000

$
2 ,0 0 5 , 0 0 0
1,168,463,000
2 ,1 3 5 , 0 0 0
3,466; 0 0 0
1,279*000

2 ,135,000
5 .2 6 6 . 0 0 0
1 .2 7 9 . 0 0 0
850,000
8 5 .9 0 5 . 0 0 0
3 .0 3 0 . 0 0 0
,6 ,9 7 0 , 0 0 0
2 2 .5 8 5 . 0 0 0
6 .1 1 5 . 0 0 0
2 1 .8 1 9 . 0 0 0

TOTAL

$1,635,902,000
0O0-

850,000

66.466.000
3 .0 3 0 . 0 0 0
6 .5 7 0 . 0 0 0
22.407.000
5 .8 0 5 . 0 0 0
20.929.000
$1,303,405,000

26

TREASURE DEPARTMENT
Washington
FOR RELEASE AFTERNOON NEWSPAPERS
Monday. December 22. 1947

Press Service
Noe S-580

Factual and analytic information bearing'on Federal income tax
exemption levels is contained in a study made public today by the.
Treasury Department under the title '’Individual Income Tax^Exemptions©
The study sets forth, data and considerations helpful in weighing the
adequacy and equity of exemptions now in. effect0 It makes no policy re—
commendations
The study presents the increases in consumer.prices and living costs
since 1939 and discusses the relation of these changes to the adequacy of
the present exemption levels. Available information on family budgets is
given©
Our War finance program, the study recalls, brought the personal
income tax exemptions down-to their present record 1 ow point0 As a
simplification move, legislation in 1944 placed exemptions, and .dependency allowan
the taxpayer
each for both normal tax and surtax*»
In considering postwar tax revision, the role of the exemptions In
the Federal tax system poses a number of specific problems:
(a ) The timing of exemption changes in relation to economic
and fiscal conditions, „
(b) The relative amounts of exemption for single persons,
married couples and dependents©
^
(c) The postwar level of exemptions in the light of revenue
requirements and the extent of reliance on the Individual income
tax as compared with other levies©
(d) The choice between tax rate and exemption adjustments©
Takinv the exemptions which prevailed in the income year 1939 as a
basis of comparison, the present per capita exemption of £500, without
adjustment for price changes, is 50 percent of the 1939 figure in the
case of single individuals, 4-0 percent for married couples, and 125 per­
cent for dependents© Thus the net result of changes^since 1939 has been a
sharp.exemption decrease for single persons and married couples, but a
substantial increase in the dependency allowance©
Price increases for goods and services accent the wartime exemption
reductions© The value of the exemptions when expressed in terms of pur­
chasing power has suffered a decrease even greater than the decrease in
dollar amounts© The amount to which a $500 exemption would have to be
adjusted upward to offset the effect of price increases since 19 jj9, 1942,
and 1944 is given in the study as being 6824, (.703, and $653 respectively©
T h a study presents the best available figures as to three levels
of family budgets, these being described as maintenance level, a modest
but currently adequate level and so-called health and^decency level*.
Comparisons indicate thau the exemptions are substantially below main­
tenance requirements for a single person without dependents and for a
married couple without dependents©

Charts and tables accompanying the study show the budget-exumpuion
at a glance for various family, statuses®
....

comparisons

There is detailed consideration in the study of data related to^
the major issue of whether the-present per capita exemption system should
be continued, or whether relatively ‘larger exemptions should be accorded
to single persons and married persons than to dependents®
Departure from the per capita system would involve some
simplification in income tax procedure.
However, the study stat., .na
a p-renter exemption for principals than f or dependents, would pio.ade
-relief where it appears to be most needed with a minimum sacrifice o*
revenue®
Certain types of exemption combinations which depart_form the per
capita'system are cited, ,under winch considqrable simplification
preserved. -Illustrations of such cxemption^systcms are! «800 x.r a sin;,
person, $1,600 for a married couple-, and $¿00 .for a dep~nd.nt, v°00
.*
a single person, $1,200 for a married couple and $¿00 for-a.dependent.
The first of these combinations would reduce r e v e n u e n u m b e r cu t^xpa^c-.
and the total tax base to roughly the same extent as woula an increase in
the per capita exemption-from "$500 to J 700 . The second woula be ' « « T » able in'its effects to a per capita .exemption- of -$600 ®
Tables are attached showing such pertinent information,au lie,eu.omption allowances since the inception of the income-tax
in 1913, and the comparative exemption experience of the unxHea
Canada and Great Britain since 1939«-

227

immvukh

ihoome

T&x mm?i
nms-

Division of Tax Research, Treasury Department
December 19^+7

m

Individual Income Tax Exemptions

A major issue in individual income tax policy relates to the
level and structure of personal exemptions.
It is the purposé ®f
this study to hring together the available factual information
bearing on the adequacy of the existing exemptions and to discuss
the various revenue, equity, economic, and administrative con­
siderations raised by alternative methods of revising the
exemptions. &o policy recommendations are made in this study,
which is designed to provide factual and analytic background
material which may be helpful in formulating such recommendations.
This study was prepared in the. Individual Income Tax Section
of the Division of Tax Research. The revenue estimates used in the,
study were supplied by the Office of the Technical Staff. Valuable
assistance and suggestions were received from other members of the
Treasury tax staff, including consultation with members of the
Office of Tax legislative Counsel on legal matters and of the
Bureau of Internal Revenue on administrative matters.
This subject has also been considered by a committee composed
of the technical tax staffs of the Treasury Department and the
Joint Committee on-Internal Revenue Taxation. An early draft of
this study was made available to the committee and it has benefited
at various points by the committee’s discussions. The material
contained herein, however, is not to be considered as representing
in any way the views of the staff of the Joint Committee on
Internal Revenue Taxation.

Division of Tax Research
U. S. Treasury Department

Individual Income Tax Exemptions
Table of Contents
Page
Summary-

H

2.

CT\

III.

Exemptions compared with essential living costs.....
A . ..Relative incomes needed for comparable welfare..
B . Maintenance budget.I U ' .... ......... ......
C. City worker* s family budget,.......... ,<•,.....
D. Health and decency bu4gpt.................. ..
E. '
.
’Break-even" points^ .:;,,. 0....................
E. Difficulties in relating exemptions:to essential
. .living costs...;....,.......... ..

K> LOUD

XI.

CM n

Specific issues in connection with postwar
tax revision............,. .............
C .. Scape of study........
............ .

H

■ • 1. , The .immediate problem....... i..... .

1
H

I. Introduction. . . ... ........
A.- Wartime, experience and current exemption levels.
B M a j o r , problems and issues ............ ..... v

12

13
16

Other considerations respecting exemption levels........IS
A * . Revenue, considerations. ..... .
lg
•
Exemptions, of $ 6oo per' capita............ ___ ig
-2 . Exemptions of $700 per 'capita....__ _.......... 19
3» Comparison of revenue effects of exemption and
.rate changes..... .................. a
. 19
B.. Economic considerations............ ................. 21
1. Consumer markets.......... ................ .. •, 21
2 . Incentives...,.... ...... .
21
3. Shifting of income tax..................^...
21
C-. Administration and compliance.... ...... .
22
D* The broad base concept.......... ....... .. ........... ^22
E. Relationship of exemptions to deductions and
exclusions.......
......... ............. ......
22
E E x c i s e taxation.............. ......... ........... .
23
G-. International comparisons...................
2^
1. Canada............... ....................... 2k
2 . United Kingdom....^
......................
2^4
H. Special problems........ ........ ... ............
^ 25
1 * Eixed income and other special groups...... , , . 2 5
2. Averaging.... ..... .................. ....... ]* 26
I. Revenue flexibility.....,.,........... ........... .
27

Table of Contents - 2
Page Ho
I'v.

Per capita versus differential exemptions.......
A. The issue... . . . . . . . . •••• • •* •••»**
•
B . Considerations involved.........
. •• •• •
1 .. .Revenue and number of taxpayers ..•.............
.2.- Eouity considerations. .,..... *•.. * • •• *'* • ** *• ■ * *
3 . Burden- distribution........... • ¿
v••

a.

b.

,H„
5».
Y,

29
29
3D
30
32
3^

Comparison of individual liabilities

under §600 per capita and Combination B,
$S00*-$1,20Ö~$H00...........
Comparison of individual liabilities
Under $700 per capita and Comoination A,

-$gOO~$l,60Q-$HOO.. . . . . . . . . . . . . r V * “

Compliance and administration. . . . . . . . . •
**•*
Technical problems,. . . . . . . . . . . . ♦ * * •* ••+• •
a. --Dependent* s income.-.
.b. Filing -requirements... M ....... ...•- •• *•

3^

35
36

Ho
Ho
Ho

Alternative adjustments in lieu of higher exemptions..... Ho
A. Tax credits in lieu of exemptions..........•........ Hi
Hi
1 , .Description of proposal......••* «►** • • • *
' Zp..Major effects... . . , . . . . . . . . .. ¿ • ♦•*• •• •* • *•* •• * Hi
a . .Revenue............. .
*«♦•*•*•** Hi
Hi
b. .Burden distribution.¿
H2
c. ' S i m p l i f i c a t i o n . ....
B. Low. starting rate....... ........... "•.
• H3
H
C . ■ Exempting incomes below a specified- level*•*•.....• • H

Appendix I'-.Function and Purpose of Individual Income
Tax Exemptions........,........... ......... ........... . •.....

'o

Appendix II — Method of Obtaining Estimates oh Relative
Incomes.. . . . . . ............. * •«»»♦ • * *....................

5^

229
■Table of Contents - 3
Page Ho.
CHARTS
1

Personal exemptions under E.ederal individual inc.ome
tax, 1913“ i9^6 *.. .- .... •**
»»*.f * •• • •,*.•* -•••• **r * * *4/*^

2

Consumersr Price Index 1939-September 19^7* •♦*

3,

I4.

5

»• ^-i1

Effect of higher prices oh purchasing power of
exemptions .. . . . . 5.-.... . ..
............ •> ..............
Present exemptions compared with estimated family
budget levels (September 1947 prices)., . . . .

. .. > vii

Effect of exemption Increases:
estimates for
individual income tax at $l66 billion income payments... x

TABLEe
1

Personal exemption, .credit for dependents, and net.,
income not subject to surtax, under the Revenue Acts
of. 1913-i9U5 . -.
. p4 .. ••.. .> .V. • -. • . . . . . . . * 55

'

2

Recent available estimates of individual and family
budgets and expenditures at- various levels, of living ... 57'

3

Estimated combined normal tax and surtax liability
■ under present law and.under various'exemptions
assuming present law rates, distributed by net
income classes,'in calendar year 19H 7 * * * *• •*
* * *♦ • • c>3

*»*■"*

Comparison' of individual income taxes under present,
law in the -United States, United Kingdom and
Canada: . .Single person, Ho dependents ...•..... .-. - • • •- 6

l*a

Same:

Married- person, ITo dependents

Ub

Same:

Married- personv Two dependents .................. 69

■vui

1+

................ .. 67

Comparison o f •family allowances, income taxes, and the
combined.effect of receipt of family allowances and
<payment of income tax in the United kingdom for
19U 7-US.and Canada for 19^7 , Married person, ■
Two dependents

J1

Table- of Contents -

k

TABLES - continued

Page Ho.

Comparison, of amounts and effective rates of x^d^ ddal
income tax under present law and under various exemp• fion systems, for -specified amounts, of net .income.

5

Single person, Ho dependents ...........,
5a

5b

Decrease in amounts pnd effective rates of individual
income tax under various exemption .systems ° ° ^ r e A
with present Law and tax .decrease? as a percentag^
present tax.liability, for specified amounts of net
income: Single person, Ho dependents!., ,.. ,....• ••••••••

5d

5e

75

4. _
o
f
f
ive rates of individual
Comparison of amounts and effect!
.
income tax under present, law and under various^ x e m p
tion systems, for specified amounts of net income
Married person, Ho dependents
...

5c

73

Decrease in amounts and effective rates of individual
income tax under various exemption systems compared wi,h
present law and tax. decrease as a percentage of present
tax liability, for specified amounts of net inco. «
..Married, person, Ho dependents ..... . ••********r’
Comparison of amounts and effective'rates of indivitoal
income tax under present law and. Under various exemp­
tion systems, for specified amounts of net income,
Married person, Two dependents
Decrease in.amounts and effective rates of individual
■income tax under various exemption systems compared
with present law and tax decrease as a percentage
present tax liability, for specified amounts of net
income:' Married person, Two dependents ....... .......
Comparison of amounts and effective rates of individual
income.tax liabilities under alternative exemu
systens of S600 per capita and Combination B, pi5U $1,200-$U00, for specified amounts of net income.
Single person, Ho "dependents ........ ............ ......

6a

Sane;

Married person-,. Ho dependents ,....... '**'

6b

Same:.-*Married person,. Two dependents .y .... ........

77

79

Si

S3

65
¿6
S7

Table of Contents - 5
..

Page ÎXô
TABLES - continued

7

*
Comparison of amounts and effective rates of
individual income tax liabilities imder alternative
exemption systems of $700 per capita and Combination A,
'.... $6.
0 0 -$l, 600 -r$^0 0 , for specified amounts of net income:
' : .„Single, person, Ho dependents,.... V,
...... 66

7a ‘

Same;

7b..-- ..Same:
6
.

M arried person,- Ho dependents................... , ...............
Married person, Two dependents » .

Comparison of amounts and effective rates of
, • individual income tax liabilities; under present
law and under tax credit proposal: Single
•
• person, He' dependents .,.... . ....... ;,........

69
- 90

. »...

91

6a

.. Same:

Married person, Ho d e p e n d e n t s t •••••♦»••*• •

92

6b

. .Same:

Married .person, Two dependents.,,,...,............

■ 93

Individual Income Tax Exemptions
Summary

1 » Wartime r e d u c tio n -in exemptions
One o f th e most s t r ik in g f e a tu r e s o f th e ■ war fin a n ce program
was th e red u ctio n in p erson al exemptions under ’th e in d iv id u a l income,
ta x * At th e low p o in t reached .under th e In d iv id u a l Income Tax Act o f
19bU, a l l pèrsons w ith net income above a f l a t $ 5^0 exemption were
s u b je c t to normal t a x * • Under p resen t law th e taxp ay er i s allowed an
exemption o f $500 each , f o r h im s e lf, h is w ife , and dependents fo r ,b o th
normal ta x and s u r ta x .
A d d ition al in fo rm atio n on th e war p erio d developments i s given in
Chart 1 , page i i , which' summarises th e exemption p ro v isio n s under th e
F ed eral in d iv id u a l income ta x f o r th e e n tir e p erio d 1 9 1 V I 9^-7» Taking
th e exemptions which p re v a ile d in th e income y ear 1939 as a b a s is o f
com parison, th e p re sen t exem ption, without adjustm ent f o r p r ic e changes,
i s 50 p ercen t o f th e 1939 fig u r e in th e ca se o f s in g le in d iv id u a ls ,
Uo p ercen t f o r m arried co u p les, and 125 p erce n t f o r dependents* The
net r e s u lt o f exemotion r e v is io n s s in c e 1939 has been a sharp d ecrease
in exemptions f o r s in g le persons and m arried co u p les, but a s u b s ta n tia l
in c r e a s e in th e dependent exemption*

2*

Exemptions and th e in c r e a s e in liv in g c o s ts

To a p p re c ia te f u l l y th e e x te n t o f th e wartime re d u ctio n in exemption
l e v e ls i t is n e ce ssa ry to ta k e in to account not merely th e d o lla r d ecrease
in exemptions but th e even g r e a te r d ecrease in th e v alu e o f th e exemptions
when expressed in terms o f goods and s e r v ic e s * The r i s e in th e co st o f
liv in g has sh arp ly.red u ced the command o f th e d o lla r exemptions over goods
and s e rv ic e s c While t h is development may have imposed income ta x a t r e a l
income le v e ls not n e c e s s a r ily intended when th e p re sen t exemptions were
adopted, i t i s in accord with th e view o f th ose who h eld th a t the income
ta x base should have been fu r th e r broadened* The in c r e a s e in consumer
p r ic e s 1939—;S ept ember 19^7 i s shown in Chart 2 , page i i i .
The amount to
which a $500 exemption would have to be a d ju sted upward m erely to o f f s e t
th e e f f e c t o f p r ic e in c r e a s e s s in c e 19 39 » 19^2 and 19 ^h i s in d ica te d in
Chart 3» page i v , as being $S2U, $ 7 0 3 , and $6.53» r e s p e c tiv e ly * This
ch a rt a ls o compares p resen t exemptions w ith 1939 exemptions ad ju sted
upward to provide th e same pu rchasing power as in 1939* Thus, 1939
exemptions f o r s in g le p e rso n s, -m arried co u p le s, and dependents had th e
same purchasing power, r e s p e c tiv e ly , as $1,6U&, $U ,120, and $659 bad
in September 19^-7*

231

i i

Chart I

PERSONAL EXEMPTIONS UNDER
FEDERAL INDIVIDUAL INCOME TAX, 1913-1946

■
Dependent
,000

1,000

500

500

■ ■ EBB

1913 15

17

19

J ill
’21

’23

’25

’27

’29

Iff]Himin ii Hi
’31

’33

’35

’37

’39

’41

’43

’45

'47

Note: For periods indicated, personal and dependent exemptions have applied as follows:
1913-1934: Exemptions fo r norm al tax only (surtax began a t specified amounts o f net income).
1934-1943: Exemptions fo r both norm al tax and surtax (1 9 3 4 -4 0 surtax began a t $ 4 ,0 0 0 o f surtax net income).
1944-1945: Exemptions o f $ 5 0 0 p e r capita fo r surtax only; fo r norm al tax, the taxpayer was allowed a fia t $ 5 0 0
exemption plus his spouse's income up to $ 5 0 0 i f jo in t return filed', and,
1946-1947: Exemptions o f $ 5 0 0 p er capita fo r both norm al tax and surtax.
Office of the Secretary o f the Treasury

Division of lax Research

_

_ . _

D -f^ rO -l

232

ill
Chart 2

CONSUMERS’ PRICE INDEX 1 9 3 9 -SEPT 1947
1939 Average = IOO
1939

1940

1941

1942

1943

1944

1945

1946

1947

Note: Based on Bureau o f Labor Statistics consumers'price index fo r m oderate-incom e fam ilies
in large cities adjusted to 1939 base.

,

Office of the Secretary o f the Treasury
Division of la x Research

P-316

\

iv
Chart 3

EFFECT OF HIGHER PRICES
ON PURCHASING POWER OF EXEM PTIONS

*AdJustments are based on changes in the B L S consumers'price index for moderate-income families in large cities.

Office of the Secretary of the Treasury
Office of ihe Technical Staff

P-3I7-C

234

V

3.

Specific problems and issues

The individual income tax exemptions are related to -the role
of the individual income tax in the revenue system, as a whole and its
overfall- strength*
In addition to the basic policy questions involved
in determining over-all revenue goals and the relative-, emphasis on
individual, business, and excise tax sources, the.question of exemption
(revision raises'the following more specific issues#
(a)

The question of an immediate adjustment of the
exemptions to take account of higher living costs, -

(b)

the postwar level of exemptions consistent with
adequate revenues and thé extent of reliance on
•the individual income tax as compared with, other
taxes,

...

(c)

the choice between rate and exemption adjustments,

(d)

the question of the relative amounts of exemption
for single persons, married couples, and'dependents,
and,

(e)

the timing of exemption changes in relation to
economic and fiscal conditions#

Other questions which may call for consideration include (l)
the possibility of a substitute for higher exemptions, such as a
special low starting rate or special deductions 'for hardship cases;
(2 ) proposals for a basic change in exemption method, involving the
adoption of tax credits or other devices in lieu of exemptions; and
(3 ) stability versus flexibility of exemptions in the. postwar tax
structure.
' Exemptions compared with family budgets
■ In legislative and other ;discussions of income tax exemntions,
reference is generally made to the objective of relieving some minimum
standard.of living from direct tax. Concepts of such a minimum standard
differ, ranging from a bare subsistence to a comfortable standard of
life. From the standpoint of sound social policy, it has been hold that
a n ,income tax exemption below the maintenance budget requirements of a
manual worker and. his family is und.esirable,because it would tend to
result in lower economic vitality, less production, and possibly higher.
Government expenditures for social purposes.

If

:

vi —

III
Chart
pase yii, existing "exemptions are compared with the
latest information (September 19*47) available for a maintenance budget
level, a modest but currently adequate standard of living for a city
worker* s- family, and a so-called health and decency budget level, 1/
'íhese comparisons indicate that present exemptions aré substantially
below maintenance requirements for a single individual with no dependents,
and for a married couple with no dependents*- H o w e v e r t h e present $500
dependent exemption apparently exceeds the maintenance requirements fob
a dependent, so that present exemptions are perhaps within the range ®f
adequacy for married couples with one or two dependents and'are more^
than adequate to cover a maintenance standard for a married couple with
more than two dependents. Present exemption..levels are substantially
below the .requirements for the other two higner levels of living for
all family sizes0
Pamíly budget data are also useful in throwing light on the question
of what relative’ámóunts ,of exemption should be' allowed for single persons,
married couples* and^dependents, as distinguíshed from the issue of the
dollar amounts or' the general level of exemptions. On the basis of the
available information with respect,to comparable living requirements for
different— Sized families, summarized in the following table, the present
per capita exemption appears to allow relatively too little exemption for
single individuals-living alone, and relatively too much for dependents,
taking the married couple with no -dependents as the standard of reference.
Present exemptions compared with Bureau of labor Statistics
estimates of incomes needed to achieve comparable
levels 0-f living
arried couple, no dependents « 100)

t.tive

Exemption

*
{Exemptions for single persons, married
j"Bureau of
jcouples and dependents, respectively,
:
Labor
.. j _____~
_;
_
of
_______ ______
: Statistics j *
:$S00, 1,600» :$8>00, 1,200»
: estidatesa/;
* f°°> ;
^00
:
UOO _
♦
.
* 1,000,, i(Combination {(Combination
i
V
;
. 500 ,
■ A)
: .
B)
__

.0 dependents
Married- no dependent s
1 dependent
2 dependents
3 dependents
h dependents

. 70 V
..100
12&

.

152.5^
•17 ^ • v •
19^.5

50
100

150
200

25 O
300

100
125
150
■ 175

67
100
133
167
200

200

233

' 50
'

a/ Average of BIS estimates for savings and diet criteria (see Section IIA,
p p a 5- 6 )«
b / Savings criterion only*

Diet data not available.

l/ Por explanation of these budgets see Section II, pp* 6^13«

235

▼ i l

Chart 4

PRESENT EXEM PTIO NS COMPARED W ITH
ESTIM ATED FAMILY BUDGET LEVELS (Sept. 1947 Prices)
Present Gross
Exemptions*

Estimated Budget Levels1Maintenance

City Worker’s Budget *

Dollars

Health and Decency
Dollars

Single Person

/

¡ ¡ P
I I I

1,000
■

m

m

1,000

^686^

■ t f
p

0

v

P 955^

t i
/////y

y

lp p ^

/

0

Married Couple
2,000

2,000

^2J36i

1000

1,000

0

0

Married Couple, Two Dep<sndents
3,0 0 0

2,000

1,000

0

v\\S\\\\\N
SNWNSWW
^WSWWW
S
S
s
sS
sS
sS
sS
sS
sS
sS
sS
s1
VNWWWW
SS
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
s
s
s
s
s
s
s
s
s
s
S
SS
SS
SS
SS
SS
SS
SS
SS
S
SS
VWWWW
V
V
W
W
W
W
V
s
ss
ss
s
ss
ss
ss
ss
ss
ss
ss
'
n.
2,225
..s.
VN
vS
s
Ss
Ss
Ss
Ss
SSs
Ss
Ss
Ss
S
WWWWW'
V
w w w wv
hWWWNW’
ss
wSSwSSwS'’
S
Sw
SS
W
WS
W\W’
s
sss
ss
ssss
WWWWW
W
W
W WSV'
W
W
W\S
w
w\w
WSwWWW'
Present Gross
Exemptions*

wwwwss
WWWWW.
WWWWW
WWWWW
WWWWW
wwwwss
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
sss
ss
ss
ss
ss
ss
ss
s
s
s
ss
ss
ss
ss
ss
ss
s
ss
ss
ss
s
i'2,0 8 0 :î

s
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
sss
sss
sss
ss
s
ss
sss
sss
sss
sss
s
Maintenance

wwww
wS
S
S
SS
S
S
SS
SS
SS
SS
SS
S
S
S
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ssssssssss
s
3,257 s
ss...»
ss
s
s
s
s
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
s
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
ssssssssss

Ss
Ss
Ss
Ss
Ss
Ss
Ss
Ss
Ss
S
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
V
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
s
s
ss
s
sS
sS
sSs
sSs
sSs
SS
S.
SV
î'
:.
3,672
S
.s
.s.s_s.
Vss
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
ss
ss
ss
ss
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
s
ss
ss
ss
ss
s
s
ss
ss
ss
ss
ss
ss
ss
ss
ss
s

3000

2,000

1,000

City Worker’s Budget*
Health and Decency
Estimated Budget Levels1

■*Minimum le v e l o f a d ju sted gross ipcome subject to tax under 1946 Form 1 0 4 0 tax table.
+Exclusive o f F e d e ra l Income ta x and adjusted to Sept. 1 9 4 7 prices on the basis o f B .L.S consumers’price index.
* A m odest but currently adequate budget fo r a c ity w orker’s fam ily.

B-749-C

0

236
~ irlii

5.

Revenue* number of taxpayers» arid tax “base

As shown in Chart 5, page x, exemption changes exert a powerful
leverage on individual income tax revenue, tax /base,, and taxpayers®
According to estimates assuming $166 billion of national income pay­
ments in I 9 H 7 , 1J on which Chart 5 is. based, an increase in the.,
exemption from $500 to $600 per capita would reduce (a) individual
income tax revenue by about $1 *6 billion or almost 10 percent 5
(b) the number of individual income taxpayers by about.5 million
or' almost 10 percent, and (c) the surtax net income base by about
|g billion or 12 percent, as compared with present law»
On the same assumptions, an increase in exemptions from v?5Q0

$700 per capita would decrease (a) individual income-tax■revenue by
about $7 billion or IS percent, (b) the number of individual income
taxpayers by about 11 million or 22 percent, and (c) the surtax net
iùcome base by $15 billion or 22 percent»
6.

International comparisons

A summary- comparison of personal income tax exemptions ih the
United States, Great'Britain, and Canada, for 19^9» selected war
years,• and under most recent postwar legislation., is presented, in
the accompanying table. As this comparison shows, m general 1939
exemptions were higher in the, TTnited States than in Gr^a.t Britain
and Canada, and the wartime exemption decrease wc
a.s relatively greatest
in the United States. Federal income tax exemptions for 19y7
cable to single individuals and. married couples are lower than the
Canadian but higher-than the British for 1 9 ^ - * The income tax
exemption for dependents is; higher in the United States-than in the
United Kingdom and Canada. However, these countries pay family
allowances for children under certain ages which in effect raise
the tax value of a dependent child»

Tf The definition of income, payments used here-is the unrevised
concept.' See "national Income Supplement to Survey of Current
Business," July 1 9 H 7 . • The current level of income payments is
substantially higher than the $l66 billion level assumed when
these estimates were ■prepared.'The higher level of. income^
payments would appreciably raise-the amounts of the revenue
losses'involved., but the percentages of the revenue losses to
the total tax liability would hot be changed appreciably.^ The
estimated, d.ecreases in the/ number of taxable income recipients
would also be noticeably larger*;

Comparison of personal exemptions and credits for dependents
in the United States,. United Kingdom l/ and Canada, for
1 9 7 9 , selected war years and 19^7

Income year 2/

1039
19U0
I9U 1
19U2
I9UU-.U5
19^7

1]

gj

Personal exemptions
S ingl Q' p erson_
Unit cd
United : United
Cenad a
States
States
t Kingdom

$ 1 ,0 0 0
goo
750
500
500
■

500

$Uoo
Uoo

720
,320
720
UUo

Credit fbr„ dependents
Harried person_
.* Unit ed
Canada
; Kingdom 7/ :

$720
6so
560
5 60
1 g.
56.O

£.2,000

66 O.
660

*$2,500
2 ,0 0 0
■ 1 ,5 0 0
1 ,2 0 0
1 , 0 0 0 :6 /

750

i, p o o 6 /

720

1 ,5 0 0

$1*000

750
750

1 ,5 0 0
1 ,5 0 0
1 .2 0 0 U/
1.200 5/

.ffiiitca t- United'

% States ■: Kingdom
$Uoo i
Uoo

Uoo
350
:500 .;£/

>Cf,nf,da
:_______

$2Uo
200
•

200

200
200

5 0 0 .6 / - 2U 0 2 /

$Uoo
Uoo
Uoo
5/
5.1 ,
(100 s/
(300 9 /

CnlefcdaKyoU^i^the^case of United States and .Canada* one-year period beginning April. 6 .of year shown in

If 6the?wlfe has earned income,”the married allowance is increased by amounts up to a maximum of $180 for
1 Q 7Q_U?, ¿720 for' 19 U 2-U 6 , and OUUO for 19 U 7 ~Ug.
■ '_
Minimum taxable limit, applicable to ^taxpayers with up to
.5
7
0
of not
^ L ^ 7 $ 1 5 0 shifts t
!+/ larger incomes the exemption consisted of an income deduction of vpfebO plus a tax credit of §15
g-

2/

5/
1/

2/
“
2/

9j

th® graduated tax starting at 70 percent,
.
1 - . ¿osi
In lieu of an income exemption the following.tax credits were deductible from the amount of tax. $28
from normal tax (rate 7 percent) and $80 from graduated tax (initial r e. ^ p e r c e n t ) . _
Surtax exemptions. Tor surtax, each taxpayer was allowed- an exemption of $ 5 0 0 ^plus. -500 for^his
spouse, and $800 for each dependent, The normal tax exemption was either ->500 or up to a .maximum pi
I ^ O O O if the'return included income of both husband- and wife, Per'igUfi and subsequent years, the
surtax exemptions were made applicable, to the normal tax also»
.
•, v
Since August 6, iqU^ a family allowance of $1’ a week or $52 a year, is paid for each child, other .
than the eldest, under l6 years of-age..
Exemption allowed dependents eligible-to receive family allowances*
about § 7 2 annually per child under l 6 years of age.
Exemption allowed. d ep end ent s not eligible for family allowances*

£ ;
j
Family allowances a e eg
.
->/ . •

23 7

X
Chart 5

EFFECTS OF EXEMPTION INCREASES
Estimates for individual income Tax at $166 Billion Income Payments
■Exemptions

(----S i n g l e ___________

500

M arried Couple___ 1,000__
Dependent._______ 500

( Dollars )•

„700.
__600
__ 800.
_____1
, 200 .
.1,400.
„1,200.
__ 600__ ___ .700______ 400

Millions of
Taxpayers
Present Law

r

_800.
1,600.
_400_

1
_l,000_. __ 1,000
J,500_. „ . 2,000
._ 500__ ___ 500

Decrease
*;::4.l :::j

1:10.5:1

40

9.0:

!M:
18.7

Tax­
p a y e rs

'A

20

38.0

44.4

39.5:

'37.4

'A

29.8

Dollars
Billions

Decrease

r.r-7-T-i

rT.r-T.T

Present Law1

> ; 7.8 I

^8.3:5

.[16.8:1-

60

27.3

40

Taxable
Incom e

69.1
60.8;

53.8

:6l.3;
52.3

;50.4:
41.8

20

Dollars
Billions

'Decrease
Present L a w

15

Tax
Y ie ld

Single ____________500
M a rrie d Couple__ 1,0 0 0 ...
D ependent ____ ...5 0 0 — L— 600

Exemptions

( Dollars )

Source: O ffice o f the Technical S ta ff

Office of the Secretary of the Treasury
Dmswn of Tax Research

B-728-2

238
- xi —

7.

Per capita exemptions contrasted with other systcms_

One of the major issues in'exemption revision is whether the
per capita system should he*retained or whether relatively more
exemption should he accorded the single taxpayer or' a spouse than
a dependent, thus departing from the per capita plan.

_

The per capita system was adopted in 19^h, chiefly for purposes
of simplification. Departure from the per capita method would involve
some loss of simplification. However,'a'greater exemption for principals
than for dependents would provide relief where it appears to he most
needed with a minimum sacrifice of revenue.
A considerable part of the present simplified structure could be
retained, under certain types of exemption combinations where the total
exemption is always a multiple of the dependent exemption. Under per
capitasexemptions, the single, married, and dependent exemptions are in
the ratio 1~2-1 0 Under one combination, designated' hereafter as Combina­
tion A, the ratio would be 2-^-1; for example, $*00 for single persons,
$1,600 for married coueles, and $U00 for dependents. Under another
combination, Combination 3, the ratio would be 2-V1.: for example, $800
for single persons, $1 ,2 0 0 for married couples, and $U 00 for dependents.
Both Combinations A and 3 appear on the whole to correspond more^closely
than per capita exemptions to the relative amounts of income estimate
y
the Bureau of Labor Statistics as needed' for different-sized, families to
maintain a comparable living standard. Combination 3 is closer to these
income relatives for single persons and married couples. However,
Combination A corresponds more closely to the income relatives with
respect to dependents,
Prom Chart 5, page x, it will be seen that $600 per capita exemptions
and exemptions of $SCO-$1,20(V$UOO are estimated to reduce individual in­
come tax revenue, number of taxpayers, and tax b^se to roughly the Some
extent. It will also be noted that $700 per capita exemptions and exemptions
of $&00 - $ l ,6O 0~$U 00 are roughly comparable in their effects on revenue, tax
rolls, and tax base,
Prom the standpoint of individual burdens, exemptions of $ S00 - $1 ,200 $U00 would accord, greater relief, as compared with $600 per capita., for
single persons but less for married couples with dependents. Moreover,
exemptions of*$g 00 u$l, 200 ~$U 00 would result in an actual reduction as
.compared with present law exemptions for married couples with more than
two dependents.
Comparison of $700 per capita with exemptions of s>S00~ .
$1 ,600 -$U 00 shows that the latter would accord greater relief for single
persons and married couples, but less for married couples with dependents.
Exemptions of $gO0w$l, 60 O~$H 00 would result in an actual decrease in the
total exemption as compared with present law for married couples with
more than 6 dependents.

xii -

From the standpoint'' of attaint Stratton and^compliance, Oomhina.tion A
would appear preferable on balance to Combination B, -his
0n S it
to the simpler treatment of married couples. Moreo/er,_.
*• ' *
open to the objection on social dnd equity grounds that it would more,,so
the tar. liability of "two_ persons because of- mfirrie.g-e,
g•

Tax cref:its in 1 ieu of exemptions

. In connection with exemption revision^ it mar/oe desirable to give
consideration to proposals for-tax credits-.m lieu p exemo, o n •
tvpical form, such P r o p o s a l would substitute for \ ^ n
^emption a
credit against tax e<,nai to the startin^rate^times £ o amount
exemption. TTndsr such a proposal, t.ie present v^OO oe- c.
would be .replaced V a credit' against tax of o05 per cam.,.:.. ,
According to latest available estimates,, tax credits of W
'5OT
capita in lieu of present exemptions, .with no other change ..in present
S w
w o S d i n c r ^ s e income, tax revenues by about -3650 mill on annually,
.assuming ftl66. billion -national income payments. .Tex credits in-li u
of S t i o n s vould. thus increase revenue without-increasing-tax rates,
f e ^ i S higher e f f e c t s ^ n o t i o n levels w i t h . ^ i v e u r o ^ g o ^ .
However tax credits* woull;Shift a larger w i y V of the burden to lar€
as against'smaller family units, particularly in .the middle-income groups,

Individual.Income Tax Exemptions

X«

239

Introduction
A.

Wartime experience and current exemption levels

In the period 1940-42 personal" exemptions were reduced by
successive steps to unprecedented levels, l] These reductions were .
an important part of-the fiscal program necessary to meet emergency
revenue requirements; In 1944 an adjustment was made, xn M e personal
and dependent exemptions as p'art of the simplification program* , n
the 1944 legislation, a flat $500 exemption was allowed for the ^ p epe e n t
normal tax and $500 per- capita for the surtax. Jnder the R e v e n u e Act of
1945. effective beginning with 1946» the normal tax exemption was raised .
to eoual the surtax exemption; For both $he normal tax and surtax,
e
taxpayer is now allowed an exemption of $500 for himself, $500 for his
wife, and $500 for each dependent»
Even in wartime, the"extent of the reduction in exemption^levels
was controversialo How that prices are high and the cost of living
rising, currbnt exemption allowances are:being criticized mope vigorous­
ly than ever * H o w e v e r t o . b e relied on as the most important revenue
source' the individual income tax should apply to a substantial propor­
tion of income receivers and of the national income. Necessarily,.this
entails personal exemptions that are low by prewar standards. In view
o'f the importance of this entire question from, both rev-nuo and^equity
standpoints', re-examination of the individual income tax exemptions
occupies a high position on the'priority list of matters for considera­
tion in connection with postwar tax revision*
B.

Ma.ior problems and issues
1#

,

The immediate •problem

The question of exemption revision has been made more pressing^as a
result of increases in living costs. As measured by the Bureau of x.*abor
Statistics.Consumers1 Price Index for moderate-income families ^ large
cities,; living costs have risen 64.8 percent from 19^9 to |cpt-;mb
On this basis, .the purchasing power of-$5QC has shrunk «o $30 - _
September 1947 as compared with 1939. As a result, it wo^ild take *>82
n
September 194? to .buy what $500 bought in 1939, (See Chart 3.) Smce^l942,
when the single person's 'exemption was first reduced to-*500, fie cost of
living has risen by 40.6 percent* Thus, compared with the average for 19.2,
the purchasing power of a $500 exemption as of September.1947 has .alien
to $356. Conversely, at September 1947 consumer prices, ;$703 would be < _
required to buy what $500 purchased at 1942 prices. As compared with
1944, the year of enactment of the $500 per capita exemption for surtax
purposes, the cost of 'living has increased by 30*5 percent ,
compared with its 1944 buying power, the 3500 exemption nas shrunx to
IJ Pop a tabular survey of Federal individual income tax exemptions
since 1913, see Table 1, p. 55»

-

2 -

$383, and the current cash equivalent of the buying power of the
1944 exemption,is about $653* l/
While the ultimate postwar price outlook is uncertain,.^there _ •
is a "presumption that prices will for some time, remain substantial^
L o v e prewar levels. In view of the decrease of .the e x e r t i o n in
terms of real buying power, an upward adjustment
prices would require a per capita exemption level of about $650
merelv to restore the substantive levels prevailing in 194,,. W .
time of enactment of the $500 per capita Exemptions.
Specific issues in connec^ipn^ijh ■
■postwar tax'revision .

t

Basically, the individual income tax exemptions are jolated
to the role of the individual income $ax. in the revenue- system as
a whole and its over-all strength, * J w subject of exemption revision
raises the. following specific issues! ' U ) immediate adjustment
the exemptions to take account of higher living costs, (2) the
postwar level of exemptions consistent with adequate revenues and
the extent of reliance on the individual income tax as compared
w U h other taxes, (3) e x e r t i o n increases versus rate reductions as
a means of tax relief, (4) adjustment of relative amounts of ^ e m p
tions (for single persons, married couples, and.dependents), an
(5) the timing of exemption changes in relation to economic and
fiscal conditions..

l/- Computed from Bureau of Labor Statistics Consumers1 Price Index
W for moderate-inoome families in large Cities (formerly known as
the "oost-cf-living index“) . The values
belnto 1939 as a base, are shown in Chart 2, p.iii,the la »
.
164.8 for September 1947. The computations shown above pro aptly
understate, the shrinkage in the real value of the exemptions_for
very low-income taxpayers, since the Consumers Brice Index 1»
_
weighted in accordance with the buying habits of a mederate-ineo
family, whereas'the budget of a low-income family, nearer the
exemption level, would Include higher proportionate expenaitures
on food, an item which has risen substantially mere than tne index

¡q.fl a.whole.

'

L

_ 3 -

240

Belated questions include the following!j (l) stability versus
flexibilityfof exemptions in the.postwar tax structure, (2 ) possible
substitutes for higher exemptions, such as a low starting rate or
special deductions for hardship cases,- (3) the possibility of a
basic change in exemption method, such as the adoption of tax credits
hr other devices in lieu of exemptions, and (4) the carry-forward
oi carry-back of unuse'd.exemptions as an averaging device*
Co

Scope of study ■.

This study is designed to bring together the available factual
information with regard to the adequacy of existing exemptions, and
to discuss the considerations of revenue, equity, economic effects,
and compliance and administration involved in alternative methods of
adjusting the exemptions. In addition, the function and purpose of
individual income tax exemptions are discussed in Appendix 1 (pages 46
to hq)a '
'■
;■ *
.
’
'- . ' ¡¡if -v‘|
•' • ■'' \ '
. ••
4
II*

Exemptions compared with essential living costs

It is common practice to appraise exemptions with reference to.
nessential living costs.” l/ While scientific budget data are some­
times used for this purpose, discussions of the. subject commonly relate
to everyday observation .or illustrative consumer budgets constructed on

1J This viewpoint appears as far. back as the beginnings of the Federal
income tax, during the Civil War period* The then Commissioner of
Internal Bevenuo stated with reference to the $600 personal exenrp—
• tion provided under.the 1864 law;
^It was, of course, the purpose
of the law to exempt so much of one’s income as was demanded by his
actual.necessities.n Report of the Commissioner of Internal Revenue,
1866, p. XXIII,
Consideration was given to the essential living-cost
approach by the Colwyn Committee in 1920 which, in discussing income
tax exemptions, noted three different income "levels where .taxable
capacity may be held to begin;
(a) minimum income necessary for
bare subsistence, (b) income adequate to ttequip and'maintain a
healthy and efficient citizen,n and (c)
income- sufficient to provide
the Conventional cbmforts and luxuries' of working people. While the
Committee apparently made no precise measurement of these, income
levels, living costs were stated to be one of the considerations
underlying its recommendations with regard to exemption levels. It
is also noteworthy that the Committee recommended stable èxemptions,
which should be increased only when the cost of living rises signifi­
cantly, See" Report of the Royal Commission on the Income Tax,
-Great Britain, 1920, pp. 55-56*' and Appendix I of the present report,
pp. 46-h9.
'
,
. ■
• •

the "basis of personal c xperience* JL/
In this section, a morp systematic
survey is made of. the available consumer' budget and expenditures .data
that throw light on the adequacy of exemptions*'
g. ;fc m
jSuch data may serve as benchmarks with regard to two different:
but related aspects of the exemption problem:-, (l) exemption levels
and (2 ) relative exemptions for different family statuses*
A summary of the more recent consumer budget and expenditure
studies by various- scientific, labor-and governmental groups is shown
in Table 2 (pages pj to 62 ) •.
_g

-

The' magor consumer standards which are available for appraising
the level of income tax exemptions are:
(1 ) a maintenance budget , 1
(2 ) a city worker 1 s family- budget which provides for a modest but
currently adcauate standard of living, (3 ) a so— called health and decency
budget, and (h) the ”breads-even1! point as found in consumer expenditure
studies, indicating where,.on the .average, family expenditures balance
income without savings or deficit*
Panily budget estimates, are designed to represent the post of a
mininum list of items considered necessary to achieve-a certain standard,
of living*; They are not a perfect measure, for among other: reasons, the
cost of obtaining; a given standard nay vary considerably among families
to which the budget relates on account of differences in spending and
consumption habits,, Thus, the number of dollars a family actually
spend's before reaching a particular standard nay often be more than the
amount stated in the -estimated 'budget* Consumer expenditure studies,
on the other hand, show what consumers, spend their money for, and are
not specifically related to anyf standard of living*
It is ne cess .ary to warn further against treating' the findings
below as conclusive. The fragmentary data, which are subject to
revision as more up-to— dato figires become available, were originally
gathered for other purposes than:-áppraising income tax exemptions.
They apply only to families of specific-types living in certain kinds
of communities*
They arc therefore not perfectly-applicable to all
living,arrangements, to all parts of the country, or to all periods of
time» The budget data have been adjusted to September 19^7 prices by
means of the Consumers* Price Index* This type of price adjustment will
produce different results than if
^were actually priced in September 19*^7» because the itpms and weights in the Consumers V Price
Index differ from- those.in the several budgets*

l/ See , for example, testimony of witnesses in;. Revenue Revision of 19^3»
*"* Hearings before the Commit tee on Ways and Means, House of Representa­
tives, J$th Congress, 1st Session, pp* 9^2~10£i6*

- 5In addition to the family budget and expenditure data, useful
in appraising the level of income tax exemptions, it is also necessary
to appraise the relative amounts Of exemption accorded different
family statuses* If it is intended to exempt from income tax a level
of income estimated as necessary to obtain a certain standard of living,
then the exemptions accorded families of different size need to be
determined in a manner calculated to achieve the intent* For this
purpose it is necessary, in the absence of separate budget studies for
each family size, to have information indicating the relative amounts
of income needed by families of different size to attain about the
same level of living*

2» “ "THe most ¡recent.figures for each' of the> available measures for
apphai sang 'the existing income tax :ex© mpilons ■ar e >b r ief1y discus-sed and
cbfepèr€&5l'n*the 'foiltiring sections/;’,<Fha fragmentary data on levels of
living have been extended for the Various family sizes indicated by
means of procedures based on data on relative incomes* 3?he figures for
relative incomes are intended to show the relative amounts needed for
-comparable welf&rej' based;: on ?savings and diet criteria, for families
Of different size.V-t> !
»
• A . r;R elative incomes, needed for-comparable welfare
»k The following 'table presents the relatives of the exemptions under
the per capita system for families of different size, Using the twoperson family as a standard,
It also shows the relatives of incomes
estimated to yield the same standard of living among families of
different size* These estimates were made by 'the Gost bf Living
Division of the Bureau of Labor Statistics from an analysis of family
expendi tur e - ';da ta.
DÌI '
■
Two criteria were selected as defining the s a m e standard of living
among different f a m i l y .group s‘ (1} the. pere ontage of income saved and
-(2) the percentage of families having fair or good diets* Under the
savings criterion, the levels of income regarded as providing the same
standard .pf, living for-..famildesr of 'different Size"are these, .which on
the a^etàge^ permit
such-.families^, to; save the same percentage of theirincomes* ,ÿnder the diet criterion,'the levels of income ;considered to
afford'comparable living tstand&#ds' for'families of different .size are
those .i^hich on ,the .average- result in the '-sâmë percentage of families
obtaining good or fair diets in each size-r
'gx*àììp» l/
’; . f

l/ 'ihl 1 é î t may be possible to question the validity of conclusions
resting on the, savings and diet factors,ralone- without- considering
other aspects of family living, it might be pointed out that those
familiar with, such, studies-jbcli eve the usé of other factors would
* no t1produce subs ta.ntially different ■re suit s inasmuch as they would
"probably be correlated..with either savings or diet«, This qualifi­
cation is discussed further, in •Appendix II rÇpp, 5 O" 5 t )°

- 6 -

Estimates of'" incomes of families of different size
corresponding to thé same standards of living, expressed
_as relatives of the amount for a two-person family
p

l/r

V;/.J*..-

r^:

vv

•

( two—person family = 1 0 0 )

‘"'V77v ; '•

- 7

.•*

«.IpFpIi;
\ _ r-ji- *Allowances for each additional
income relatives
t
. • Income
. „
,_
JJ•x'»•--77,
:person, as percent of amount for
'yl'llS&e1:V.Her, capita, :based on a/
:two-person family, based on
" ;T’-'of 7 r ç exemption. Savings
Savings
, . ■ fi et
met . ,
family
criterion^criterion,j 'ÌMcriterion
y criterion
a y

i

(2 )

•- --I- / .
.50
-- : :s ■ , • : 100
•
3
.. Ì ! 150
' A
200
' •5
•- •.. 250
6
. 300

!

$

(3)

;

(4 )

•70 io
: 100 . •■ .100 $
129 f
127
151
154...
■ 172
176
191
% isa.. ^

;

(5 )

30
27
24
21
19

- ;

.'

(6)

i
29 $

25
22
22

bJ J o t detailed explanation of construction and source, see Appendix II*
by Hot available*.,
V -

;The above figures for relative incomes needed for comparable welfare
for different— sized families indicate relative incomes cf about 7~H>-*2*5
for single, married^ and dependent persons, respectively,.as against a
ratio @f 5-10-5 under per capita exemptions. As against exemptions
which would cover comparable living standards for families of different
sizes, the per capita exemption system appears to accord relatively too
little exemption to single individuals and relatively too much for
dependents, taking the two-person family as a standard of reference*
B. .Maintenance budget
The maintenance: budget is intended to represent the minimum standard
of living necessary to maintain health and efficiency of a manual worker
with a family of four living in a .large city* A maintenance budget for
larger or smaller families is O n e ;which ‘provides an equivalent standard
of living* ¡For the purposes of the present study the maintenance budget
was based on the latest figures published by the Heller Committee for a
•’dependent^ married couple,
l/ These figures were adjusted upward by
1/ The Heller Committee for Research in Social Economics, University of
Calif ornia, Quantity and Cost Budgets for Depe.ndent Families or
Children, Prices for~ San Francisco, September 1946:> The term
^dependent ,n as used in the Heller .study, refOps to persons who are
■supported entirely by public assistance or are supported in part
publicly and in part through earnings*
See Table 2, p* 58, and footnotes
for details of the adjustments Indicated in the text.

I;

242
~

?

~

adding allowances for expenses of medical care,, life insurance, an.
social security taxes which would have to he met by a self-sufficient
couple. The augmented budget excludes savings (other than that
included in the small amount of life insurance) and Federal income
tax. l/ The figures for the other five family statuses shown in rae
following table were obtained by applying the estimated income relatives
(based on the diet and savings criteria) to,the couple s budget.
he
present exemptions of $500 per capita, applicable against net income,
were raised to correspond with the maximum amounts of income not
subject to tax under the tax liability table which allows for a
standard deduction of about 10 percent of adjusted gross income.
Thus, thè married wage earner with income of less than $1*125 hac no
income tax liability under.the tax table. ^
The estimated budget data, being fragmentary,^naturally carry
the limitations applicable to the basic figure of .$1,364 for a twoperson family, as well as ¿he imperfections superimposed oy tne
statistical procedure. The chief qualification is related uo tie
fact that the two-person family maintenance budget relies mainly on.
the public—welfare-standard budget of the Heller Committee. This
budget applies to the San Francisco area for September 1947. 1 / ^
In the'absence of estimates having greater scope,, .the San Francisco
figure is taken roughly to represent all urban areas«

1J The Federal individual income tax liability is excluded, since the
budget data are being used to appraise the present exemption level
at which no income tax is paid.
.
'
•
2] The Heller budget.was priced in September.1946 .and the figure for
a dependent couple with employed, husband was $1,242.as of that date.
.The price adjustment to September 1947 made here is in accordance
with the statement of the Heller Committee that «although the
items and weights used in the•Consumers■ Price Index .and these
in the Dependency Budget'differ considerably, a very fair approxi­
mation of the increase in the cost of the Dependency Budget to any
given date may be obtained by applying the increase shown in the
’ monthly Consumers1 Price Index for San Franciscoxsinee. September
1 9 4 6 . The:Heller Committee for Research in Social 3ccnomics>
University of California, Quantity and
Families or Children. Prices for San Franci,sc p ^ ^ p t e j ^ e j ’_2g46. p. 6.

- 8 -

Comparison of present exemptions with estimated .budget amounts
at the maintenance level for ..families of different sizes a/

Size.
of
family..(l)

Present.
..gross
exemption

•■ ( a ) ' —
$

..Estimated
maintenance
budge t-s b/.
.

Di ff er enee-1 c/
..

\,isL ____

550
1,125
1,675

$ 955
1,364
1,746

2,225
2,775
3,350

.2,060 ;§J
2,373.
2/653

.■

U)

. $ - 40i5
’r - 239
- 71
145
.402
, 697

a / Estimates are based on budget data as of September 1946,
adjusted by means, of. .the Consumers 1 Prise Index to September
1947, for consumers residing in San Erancisco, (See also
Table 2, p«> 5S, and footnotes,)
1
,
b/ Constructed from relative incomes (2~person family - 100; .ana.
Heller maintenance budget for a married couple with husband
employed and with allowances added for medical care, .li.-^e
insurance,, and social security taxes«
;
c/ Minus signs denote excess of budget amounts over exemptions»
d/ This figure compares with the figure, of $2,136 for a- 4-person
family obtained independently on. the basis of the, elder
maintenance budget data,
• ■ •- f

According to the estimates in the table above, maintenance budgets
require'about $950 for*a' single individual, about $1,350 for a marrie
couple, and roughly $300 to. $400 for k dependent. Judged by maintenance
living standard»,, present exemptions appear to be (a), inadequate to
exempt single .persons:or. married couples, (b) probaDly close to_the
range of adequacy.for families o f .three, and four, persons, considering
that the data are fragmentary and.may.involve relatively, large errofS,
and (c) more than adequate for individuals entitled to at „east dive
exemptions, with'an indicated increasing margin of surplus as the
number of dependents increases.

~ 9 -

C.

City worker 1 s family budget

Recently the Bureau of Labor Statistics completed a study of costs
of living in
large cities of the United States "based on a city
worker's family1.budget priced in March 19^6 and June 19 ^ 7 , l/
This
budget is for a.family of four•persons i a. .nan who is a, city worker;
his wife, a homemaker devoting her full attention to the caj*e .of the
home and the children;. and two children, a, 1 3 -year- old high— school "boy
and an 8 ypar old grade-school girl. - For this type of family, the
budget is stated to represent amounts necessary to provide family
health, worker efficiency, nv.twre of children, and social participation
b> all members of the family* It is descriptive of a ’’modest but
currently adequate tnited States standard of living-*" It is neither
a minimum'’ nor a. "luxury” budget*
It is not an ”ideal’’ budget based
on.the notions of a few people as to what workers should have » It
is based on the kinds of-goods and services workers’ families actually ’
select*
;
.
.
The accompanying table- presents the cost of this budget in jk
cities in March I 9 Î+6 and June I 9 V 7 . In June 19 ^ 7 , the total cost
of the goods and services-J2/ ranged from a low of $2 ,73 *+ in lew Orleans,
Louisiana, to a high of $3,111 in Washington, D. C* The estimated
total cost of the budget ¿/ ranged from a low of $3 ,00 U in Hew Orleans
to a high, of $ 3 »453 in the District of* Columbiac
For San Francisco the total cost of goods end services was $2,96^and the estimated total cost of the budget, was $ 3 ,3 1 7 in June 19^7* in
general, these costs are higher than the Heller maintenance budget
(pages 6 — 8 ) but lower than the Heller health and decency budget (pages
12- 1 3 )y
'e '
, \
.

1/ See statement of Mr. Ewan Olague, Commissioner of Labor Statistics,
on The City Worker’s Family Budget before the Western Subcommittee
of the Joint Committee on the Economic Report, December l6 , 19 )4.7 ,
For a general description of the purpose and methods followed in
developing this budget see, "City Worker’s Family Budget," U.S*
Department of Labor, Bureau of Labor'‘Statistics, .December 19 )4-7 ,
2 / Includes food, housing, 'clothing, medical-care, transportation,V
other goods and services such as reading and recreation, personal
care, tobacco, and gifts and contributions to church and charity
J/ Includes other outlays besides goods and services such as life
insurance but no other savings, occupational expenses,, and poll,
local, State and Federal income taxes*

V

1

-

;; CITY WORKER* S

10

-

FAMILY

'

budget

TOTAL COST OR GOODS ADD SERVICES WITH ESTIMATED TOTAL COST OR TEE BUDGET
3 U CITIES - MARCH 19 U 6 AH) JULIE 19 U 7 U
IU ORDER OR TOTAL COST OR GOODS AND SERVICES III JUNE 199-7

City and State

Washington, B# C* ■
Seattle, Wash*
New York,. N*Y*
Kilwaukee, Wise*
Boston, Mass*
Detroit, Mich*
Pitt sburgh, Pa*
Minneapolis, Minn*
Chicago, III* ■
Sah;Francisco, Calif*
Baltimore, Md*
St* Louis, Mo*
Mobile,-Ala»
Norfolk, -7a*
Memphis, Tenn*
Los Angeles, Calif*
Birmingham, Ala*
Richmond, Va*
Cleveland, Ohio
Portland, Me*
Denver, Colo«
Philadelphia, Pa*
Scranton, Pa*
Savannah, Ga*
Portland, Ore*
Atlanta, Ga*
Buffalo, !T?Ys
Jacksonville, F l a * •
Manchester, N*H,
Cincinnati, Ohio
Indianapolis, Ind*
Houston, Texas
Kansas- City, Mo*
New Orleans, La*

:
March 199-6
June 199-7
Total Cost : Estimated : Total Cost : Estimated
of Goods
: Total Cost : of Goods : Total Cost
of Budget 3 /
& Services 2/ *of Budget 3/ :& Services 2/
S 3 , ui'
3.05!+
3,019
2,988
2,9S1
2 ,97 ^
2,973

2 ,9 6 5
2 ,9 6 5

z,3&>
2,99-92,923
2,925

2 ,9 1 9
2 ,9 1 2
2 ,9 1 0

■

$ 3,^S
3,388
•3,3^7
3,317
3*310
3*293 •
3,291
3*232
3.232
3,317

2 ,8 6 7
2,366
• 2 ,3 5 5
2 .85 U

2 ,3 5 3
2,899-

2 ,8^3
2 ,3 3 7
2,830

2 ,7 9 0
2 ,7 4 6
2,739

2 ,739-

2,718

2 ,6 6 0
2,533 •
2,575
2 ,59 s
2.57S
2,535
-2,550

2 ,5 6 1
2,5S2

3 ,2 6 0

2 ,5 6 5

3.2'4?
3 . 27 S
3 .2^1

2,580
•2,557

3 .2 2 0

3,251

3 ,2 5 1
2*9092,397
2,899.2 ,3 7 0

$

3,223

3 ,2 0 0
3 ,2 0 0
3 ,16 s
3 ,2 0 3
3 .1 6 3
3 ,1 5 0
3 ,1 6 1
3 ,1 5 0
3 ,1 3 6
3 ,1 3 5
3 ,1 3 2
3 ,1 1 9
3 ,0 9 s
3 ,0 2 0
3 ,0 1 0
3 ,00 H

$.2,985
2,913
2,820
2, 811
2,89-2
2,813

2 ,7 6 1
2,779
2 ,793
2,853
2*797
2,829-

2 ,8 2 6

,

2,809-

2 ,5 6 3
2 ,52 ^
2 ,5 1 2

. 2 ,7 6 6 .

2,521

2,781

2 ,592
2/495
2 ,5 1 1

2 ,7 5 0

2 ,7 7 6

2*999
2*992
2,9-22

2,712
. 2,735
2,711
2,681
2,623

2 ,5 0 2

2 ,7 2 1

2*521
-2* 9-75
v 2,915
2,966
2 ,981
2,9-67
2,990
. 2 ,3^5
2 ,U0 5 ,
2 ,3 S 1 .

2,691
2 ,6 1 5
2 ,6 7 7
2*700
2 ,67 s
2 ,6 6 7
2 ,5 3 2
2 ,6 0 3

2, 7^S

\2,573

1J The total dollars necessary to provide family health, worker efficiency,
nature of children, and social participation "by all members of the family*
For relative differences "between cities, see other side of page* For ^eS~
pription of this "budget, see °City Worker’s Family Budget,0 R* 1909» or
Monthly Labor Review. February 199-8*
2j Includes food,'housing, clothing, medical care, transportation, other
goods and services such as reading and recreation, personal care, tobacco,
and gifts and contributions to church and charity*
3/ Includes other outlays besides goods and services such as life insurance
but no other savings, occupational expenses, and poll, local, State and
Federal income taxes*
SOURCE:

U.S, Department of Labor, Bureau of Labor Statistics, Washington 25»
D* C*, December 199-7*'

-

11

-

:vr ■'io^V^tirpps.es-.-of, presenting’the BI»S:-Gl%y Worker’s. Family Budget
iti -the. same’inànn.er, as- the :-two: -Heller Budgets, the BBS June 19^7
Budget' for; San. Francisco was .
M odified to exclude federal', inpome tax
rahd then adjusted .to September- 19^-7 prices "by means of the BBS
Consumersf Price.Index for San,tErancisco0 Since thè’ City Worker’s
Family'Budget is available, only: for rthe four-;f?erso'n family? the
estimai és^.fòr the. Six family 'Statuses 'present ed:;in the table below
vére obtained by „applying tha income relatives •
‘
b ased on the diet and
savings- criteria t,o the adjusted: budget figures for the' four-person
wage 'earner, family*
• • >,
'•
Comparison of present exemptions with estimat ed'city worker ’s
family budget amounts, for families.of different sizes a /
Size'
of
family

m
1

bJ

b/
.•

: '
Present
.
• Estimated ,'' '
:
gross -:
: . citr
v worker’s- t Differences
. family budgets by■>
i ' ' exemption
W
W
: '
(2)
.
(3l .;• 7. :
$ ^50
1 .1 2 5

Ì 1,^95

2
3
h

l.S?5

2 ,2 2 5

2,156
2,7^
5,257

5
6

2,779
3,750

'4,15U

5 ,7 1 6

é

- 9Ù5
—1 5Oil
- 1*059
-1,052
~9hl
-SOU

Estimates are based on budget data as of June 19 ^ 7 ? adjusted by
means of Consumers’ Brice Index for September 19^7, for consumers
residing in San Francisco*
Constructed- from relative incomes, (four-person family
100) and
BBS budget for city worker’s family of four exclusive of Federal

• incom e-tax* .'th e estim ate o f $3*257 fo r September 19^7 i s ^ -p e r—
; •.dent higher than the June 19^-7 BBS figure of-$3*171 exclusive of
Federal income tax*
/ ,!
cj Minus signs denote excess of budget amounts over exemptions.
. the. estimates, presented in the above table indicate th^t a modest
but currently' adeluat a' level of 'living re.ou.ir.es about $1 *5$®- for a single
person, about &2,15®. for a, married couple",'and roughly S % 0 to $600 for
a dependent*
Judged by these estimates, present aggregate exemptions
appear to be substantially below this standard of living for all sizes
of family units*

12

D«

Health and decency “budget

The health and decency budgets» Incorporating what is sometimes
termed the American standard of living, were developed by the Heiler
Committee for a single person and a specified type of four-person family
at various income levels (executive, white collar» and wage earner) and
have been revised yearly«, 1 / These budgets attempt to measure the
cost of a peacetime standard of healthful and reasonably comfortable
living --* a standard containing the same items.as in the prewar years
1939-40-41j including all taxes, adequate medical care, recreation,
and life insurance, but no other form of savings* 2j For the purposes
of the present study, the Heller budget figures for the wage earner’s
family have been selected. The wage earner's budget was modified to
exclude Federal income tax, and then adjusted to September 1947
prices by means of the Bureau of Labor Statistics Consumers' Price
Index for San Francisco«»

zj

Since the health and decency figures are published only for two
family sizes, a single working woman living alone and a four-person
family, the estimates for\:the six family statuses shown in the
following table were, obtained.by applying the'income relatives.based
on the diet and savings criteria to *the adjusted budget figures for’
the four-person wage earner family.
^

1/ The Heller Committee for Research in Social Economics,
University of California, Quantity and Cost Budgets for Three
Income Levels, Prices for San Francisco, September 1946* and
Quantity and Cost Budget for a Single Working Woman. Prices for
San Francisco, September 1946,

2j During the recent war years the budgets were modified into

zj

wartime budgets to take into account the problems of scarcities,
rationing, war bond purchases and other wartime situations* The
peacetime budgets were restored beginning September 1946*
Further detail.is given in Table 2 ,,.p* 5 7»

245

- 13 Comparison of present exemptions with estimated budget
amounts at the health*and decency levels
for families of different sizes a/

Present
gres&;•
' l:
exemption

Size
of
f abiily

i'z)

(i) .

$ 550
1,125
1,675
2,225
2,775
3,350

i'

2
3

'4
5

6

"Estimated *
health and
decency
budgets J>/
(3)
$ 1,686 d/
2,408
3,082
3,672
4,190
4,683

* 'difference
:•

cj

(u)
,$..- 1,136
1,2$3
— 1 ,,407
. — .1,447.
• - 1,415 .
,t , - 1,333

a/ Estimates, are" baoed on. modified budget data-as of September
4 , .1946,. adjusted by means of the Consumers’ Price Index for September
.1947, fop consumers residing in San Francisco* (S’
ee also •Table 2,
p*57 and:footnotes))
,
, . ,
b/ Constructed from relative incomes (4-person family = 100; ana
Heller Committee budget for,-wage earner 1s family'of four exclu­
sive of Federal income tax»
%..c/ Minus signs denote excess of budget amounts oyer exemptions*
dj This figure compares with the figure of $1,910 for a single
working, woman obtained independently On the; basis of the -eller
Committee budget studies*.
The estimates presented ins the above table indicate that nealth
and decency levels require about. $1,7Q0 for a single individual, about
$2,400 for a married couple, and roughly $50.0 to $650 for a dependent*
Judged by these estimates present aggregate exemptions appear td^be
substantially below-the health and decency level for all sizes of family
units*
E,

■•
»Break— even11 points

A useful expenditure-level concept is the «break-even» level* The
break-even level is the point in the income scale where families, on the
average* neither save nor go into debt. Below the break-even^level,
families‘typically-fall' back on their past savings-or borrow m order to
meet expenses. Above the break-even level;families, on the^average, ‘
manage to save part of their -income'.: The break-even point is computed
from data' showing actual expenditures and savings-- or large groups o
families with different .incomes. Unlike the other budget concepts
referred to above, it does not represent a specifically defined leve
of living arrived at by adding up the total cost of a number of selected
consumption items.

In appraising income tax exemptions, the break-even level mayserve as a benchmark from both economic and equity standpoints. ^ wpi*t
the break-even point is significant in indicating the income levels
where taxation would have a heavy impact on consumer spending.
wise* the break-even level is important because it may be regarded
as unfair to tax individuals whose incomes are such that they are
unable to save or are compelled to use past savings or go into debt. y
In 1944 the income level ©f the break-even point was higher tnan
the amount of the maintenance budget and lower than the amount of xhe
health and decency budget, indicating that, on the average, savings
do not appear until family income is substantially above the minimum
amount given by maintenance requirements« (See Table 2, pages 5
This may be taken to throw, light both on the average -willingness to
save and op the stringency of the maintenance budget concept. However,
it cannot be concluded that families at the break-even level live at
a maintenance or any other specific standard of adequacy, since as
previously indicated, the actual plane of living of a family depends
not only upon the amount of income but also upon the-way such income
is spent and the goods purchased.:are utilized.
The following table shows estimated 1944 break-even points for
six-family statuses. These were determined by applying to the break­
even point for a married couple, as .obtained from the actual expendi­
tures data, the income relatives based.on the savings criterion« In
a sense break-evdn data are more complete than the budget data m that
they can be obtained for more sizes of family and represent the average
for all family types in all large cities. However, the information
tends to be-unrepresentative for the larger family sizes because of the
large sampling fluctuations inherent in this type of data when obtaine
from small-scale surveys. For this reason the break-even points for
five family sizes (that is., ether than the two-eerson,family for *mic
the data are considered to be^representative)' were determined by the
use of income relatives.

1/ ■■’here an individual who is using past savings
income tax, he is inclined to feel that he is
of capital and not income,- • If- he must borrow
is even more inclined to feel that the ta? is

is required to pay
paying the tax out
to pay the tax, he
unduly burdensome.

- 15 The break—even points for 1944 have not been adjusted to September
1947 on the basis of the over-all price index adjustment used to inflate
the budget data discussed above» Such an adjustment procedure in con­
nection w i t h the break-even point would not' be valid since the relation­
ship between changes in prices and in the actual break—even level
probably would not be as simple as the adjustment might imply*, l/^ The
break-even point varies with changes in the families* actual expenditure
habits and response to relative price changes which are ,not reflected in
the price index* Moreover* the break—even level may also depend o;n such
other factors as the presence of liquid assets, and the optimistic or
pessimistic economic and employment outlook*
Comparison of present exemptions with break-even points
for 1944 for families ©f different sizes a/

%
Size :
Present ♦ Break-even points given
by
relative
incomes
♦ Difference
of t
gross
:
(2-person
family
»
1
0
0
)
b/
:
family: exemptions :
$>
(3)
. •
(1)
:
(2)
:
1
2
3
4
5
6

$ 550
1,125
1,675
2, 225 X
2, 775
3,350

,

$ 1,045
1,493
1,896
2,254
2,568
2,852

$ - 495
-.368
- 221
- 29
207
498

a/ The break-even figure for a 2-person family is determined from the
1944 survey of civilian spending and saving conducted by the Bureau
of Labor Statistics* The figures for other sizes of families are
obtained by applying' the income relatives based on the savings
criterion* The figures based on income relatives vary to seme
extent from the independently determined figures computed from the
survey of consumer expenditures in 1944 shown in Table 2, p* 59*
but are regarded as more suitable for present purposes because of
the large sampling fluctuations inherent in survey data relating ,
to families larger than the average size»b/ Family money income net of income, poll, and personal property taxes,
cj Minus signs denote excess ©f break-even points over exemptions*

1/ Thus, if the result ef adjusting 1941 data to 1944 by a price index
is compared with actual:changes,in the break-even levels for families
of different sizes, considerable differences arise* .From 1941 to
1944, the increase in the break-even point varied from 1 percent for
2-person families to over 80 percent for 5-person families, whereas the
Bureau of Labor Statistics Consumers’ Price Index increased by 19 per­
cent in that period, (See Table 2, p *. 5?s
f°r 1941 &nd 1944 break­
even points.)

- Id

< With reference to 19 ^ breate-even levels, excretions -appeared^to .
be Inadequate"for fanilies o f less than four n e p e r s n d exceeded the
break-even levels for- fanilies of five or more. B w «29. dpficivney
for the four-person fatal? in 19 ^ ' is probably, within tno area, of
■.
error and should not be regarded as significant, Eoxx>h adjustments
to those break-even levels:for price increosc-s suggost that, at
Septenbor I 9 U7 prices, the bresJB-every levels probably exceed .presort
exemptions for ail sizes of
y.

fanily-. units*

._

Difficulties in relating exemptions

Assuming agreeoent on the' principle that it is-desirable to exonpt
sons ninintm living standard, a number of conceptual and. piactical^.
difficulties are involved in its application,
-fella n o t ^ ^ . s t i v e
the. following list indicates the .»ore important of su.cn difucultios.
(1) M i n i m a living.: st^n&mrd concepts are elastic. Any
acceptable concept would .probably bo' far- above a bare P^siblo^iaal
nininuzu That is, no dor n concepts of living.; needs do no.t.jj ^
P
a clear-cut distinction anon- necessities, amenities, and luxuries*,
(2)
Important differences apparently exist in the ran/;;c of
living costs and certain of the requirements even when .comparisons
« c nado among large cities, for example, the accompanying t a b l o ^
that the relative difference in total cost ox- gooas r.no servxces xnolvd 4
in th.6 Bureau of Labor Statistics' City Worker's i w d l y Budget ranged
12 percent, or iron 88 in Hew Orleans, Louisiana to 100 xn Washington,
D.C. The cost of housing is particularly important in accounting for
differences in the costs of living anong these. cities.
m u s , tac- a
relative difference in the cost, of housing ranged 3 5 percent, or ,ron
6 b in Hew Orleans to 100 in Washington, B. C. When the 3 highebt co
cities and the 3 lowest cost cities are excluded iron the range 01
-living costs, the relative difference in the total cost of goods and
services 1 b reduced by aboul ono-hslf*
ill Different tnxpn.ver grovns enjoy varying m o u n t s of .real
or non-cash income that. is
t . - J U s u c h a s the .rental value of
owner-occupied hones and hone-grown foods. A uniform exemption do ^
not decrease these disparities between fanilies of fcie sane size, as
for exanolo, between rural hone-owner and urban sonant, ana consequently,
'an exemption of a iven dollar m o u n t nay relieve iron tax substantially
different real living-standards. Moreover, issues are also rax sod m t h
respect to the varying m o u n t of nontnxe.blo roftl income between .a l l i e s
of different size, For exnriple, the income Relatives indica c
% a
single person requires about two-thirds the incone of a narrio coup _
to attain the sane standard of living... The contribution of a substantial

| | /|
S 9 g

f ÿ iv 1 1 ;
y - .

i-

’ ;

"

247
..-,

O
fed

0
0
cn

CITY TvOBEER’S FAMILY BTJDG3T

1 GOODS , U T S AMD SERVICES
IN -THERELATIVE DIFFERENCES :
, 3h CITIES, JUKI: 1947 AND MARCH lQh 6Wo 0hingt on D * c
100

City and State

'm

:Total Cost :
Pood
of Goods ' *
Services •
iJune sMar.
June; Kar»
:19h7 :i9h6 i 191*7 : 19h 6

•

Atlanta, Ga*„
Baltimore, Md*
Birmingham, Ala»
Boston, Mass*
Buffalo, N* Y*

92
95
93
91

89

100
101
102
102.
100

Chicago, 111.
Cincinnati,. Ohio
Cleveland, Ohio
Denver, Colo*.: ;
Detroit, Mich*

9591

9h

101

93 •
96

9292
95

ss

SS

96

92

Houston, Tex*;
Indianapolis,; Ind*
Jacksonville, Fla*
Kansas- City, Mo* ■*
Los Angeles,; Calif*

9h

91
oh
07
-.

¿3-

96
91

96
101
100
102

100
101
102
105

102

«
i
:
:

»:
:
Other •••.
Clothing. r. Hous ing
!
:
J une: Mar*. » June : Mar* ♦June :Mar*
19Îr7 • I9h 6: X 9Î+7 ; I9h6:i9h7::i9h6

90
90
*. 92
91
9h

102
- 9S
100
100
102

98
96

37
39

99
9h

96

90
91

100

100
99
102

ss
92

9S
101

100
102

39
92

Manchester, IT* H*
Memphis, Tenn*
Milwaukee, Wis*
Minneapolis, Minn*
Mobile,'.- Ala* .

91 ' '9 1
9^
93
95
-96
9h
95
9h
9U.

102
101

103
101

99

99
99
105

39
92
100
. 103
90

Hew Orleans, La*.
Hew York,, N* Y* Norfolk, V a «
Philadelphia, Pa*
Pittsburgh, Pa*

SS

Portland, Maine
Portland, Ore*
Richmond, Va*
St* Louis, Mo*
San Francisco, Calif *
Savannah, Ga*
Scranton, Pa*
Seattle, Wash*
Washington, D* C*
SOURCES

90
91
SS'

ss

99
97

99

101 '

102 . 10h
105
105
102
101
103
102
101
102

92
102
9h
9h

10h
101
100
101
103

90
90
90

102
101
106
100

35
93
99
100

97
92
92
96

95
a ll
j 1
90
93

93

92
93
9h

103

95
95

100
102

9-7 ?e 89
9S
100

102
101

92

93
94
95
92

92
9S
100'

90

7

O

oni

105
100

93

91
97

S2
91
9'h : 89
SI
37
35
39
' 90
77
'

Si

92

SO
sh

102

9h

91

71
91

95
9S
95
9h

79

79

.79
S2

SI
39
sh

73
77
77

¿9

70
75

76
73

H

37
9.2 :
39 9397
sh -

93

f' 95 •-. • 95
00r

SI

70
73
.

77

sh

SS

39
S9

101
10h

97

.

95

95
91 •
9h
93

96

103

. 77

93
9h
93

71
75

106

$k

90
9h
93

96
105
9h
9^
99

' 97
107

9h
76
33 . 93
37
99
37
93
37
93

96
93
100
9h

65
91

95
S6
102
90
97

96

so

'65 -

97
93
92
9h

90

S2

93
90
SI
99
'll . 93
S 2 100

91

S2

SO

77
39

100
9h
96
SS.
79 105

lo h
96

S3

9h
9h
10s
100

9h

37
90
93
37

SS

99

100

:

SI

79

SS

73
33
73
sh
100.

.

95

75
39

75
SI

100

93
95
105
100

wCity Worker1 s Family Budget, n U, S* Department of Labor, Bureau
of Labor Statistics, Washington 25, D. C*.,, December 19^7»
Table 2, p* ho*

95
99

106

amount of real income which ushal-ly-. is•nad© by the housewife to the
family is an important reason why the" couple does not need twice the
money incpne -of,.a .single person to. attain 'the same standard .of living#
Since the in<?om^-tax< applies primarily to-monoy. incomesi the use .of
the -above ’ratio' to determine the relative •amounts' of exemption,
accorded ^single persons and married couples would seen to involve ;•
taxing the real ,income added "by the housewifé*

’‘ *■

(h) Particularly in the case of single individuals with
..
no dependents, minimum living costs will vary,'-for example, as among
..■
(a) older persons maintaining separate households and (b). younger
persons living, in the parental hone and sharing expenses with a family
group* As already .'indicated, the amount of money-income needed "by
families .to attain thé same level of living will also vary depending
,' '
on whether the housewife works at home or is gainfully employed*
Under the circumstances, given the exclusion of certain types of
non-money income from the tax "base and the practical necessity of
applying, exemptions on a uniform, nation-wide basis, it is necessary _
to choose (with respect to. a given size of family) "between a lower ';
'»•••••
exempt ion”which-will bear somewhat heavily on high living-cost groupb
r ■
and a higher exemption which will lose more revenue, or to strike some- ' • i"
average^ It is also necessary to use the income relatives with caution’ r' in considering the'amounts of relative exemption which would appear to
give comparable standard of living exemptions to families of different
size*
I
p
•
III*

Other considerations respecting exemption levels
A*

Revenue considerations

,

*

'¿\

Revenue need is another important factor which must be weighed
in the balance along with standard of living considerations in deter-'' ? ■
mining1.the desirable level of exemptions# In this connection it should. <
be noted that relatively moderate changes in' the level of exemptions
produce substantial changes in the revenue yield of the individual
income tax*
. ■ '•
{ '
W
;

' •
1*

; ".. ; .•

Exemptions of $6C0 per capita

,

X-' •

• ;
g

• Y-.

X

it.is estimated, assuming present law rates and income payments
. ’
of $l66 billion, that an increase in exemptions from §5^0 to $600 per ! '
capita would redu.ee individual income tax revenue's by about $ 1*65 billion
in calendar 19^7s °r almost 10 percent# Under exemptions of $600 per - , .
capita, the number, o f .individual .income .taxpayers would be about bb million,,
or about U*7 million loss than 'under présent law, a reduction bf about
10 percent*
The surtax net income base would bo reduced to' y6'0#8 billion,
or $g*3 billion less than under present law,, amounting to a -12~percent
reduction*

248

' - ig -

2*

Exemptions of $700 per capita

Similarly, an increase^in exemption^ from $ 5 0 0 'to'$-700 per capita
is estimated to decrease individual income tax revenues "by about $ 3*03
"billion or about 18! percent» At this higher level of exemptions, the
number of individual income taxpayers would "be about J8 million, a
reduction of about 10,5 million, or 22 percent, from present law. The
surtax net income base would be reduced to about $5^ billion, or $15*3
billion below present law, amounting to -a 22—percent reduction,
A summary of estimated revenue yield, surtax net income base, and
number of taxable income recipients is shown in the accompanying table
for the three exemption levels of $500 per capita, $600 per capita,
and $700 per capita, if
3*

Comparison of¡revenue effects of exemption and
rate
------changes
----2-- <
r
s
|g , ;
tM v »
A'
'W
Vfith an estimated 19^7 surtax net income base of $69*1 billion
under present law, a $100 increase in exemptions on the per capita
basis would be equivalent revenue— wise to a reduction of about 2,U per­
centage points in the combined normal and surtax rate applicable to
each bracket, A $200 increase in per capita exemptions would equal a
reduction of
percentage points in the combined rate scale in all
brackets. The distribution of the reduction under these alternative
rate reductions would, of course, be quite different than under the
indicated exemption increases. This results from the fact that lowincome taxpayers,would have ,their tqxes considerably reduced oit even
entirely eliminated under,exemption increases, whereas the rate
reductions would not give so great a* decrease and. would not remove
anyone from the tax rolls* Thus, the $200 per capita exemption
increase wo-uld remove the tax on a married couple with $1,U00 net
income, whereas the
point rate decrease would still leave the
couple with about three-fourths of its present tax liability. On
the other hand, a couple with $100,000 of net income would have
a reduction Of $331 under the $200 exemption increase as compared
with more than $H,.000 under the U,h~point rate decrease»

£7

See also Chart 5 and Table 3 of this study (pp, x, and

„

Estinp.tod Huribcr of taxable incone recipients, their i n & a x n e t in cone
do^igd n o r ^
tax and surtax -under three per capita exemption levels, in calendar^year 4.9 (
,
(assuming income payments of $l66 ’billion)

« Taxable income recipients.
%
• Decrease
no crease iron
from •
ts|
j . present ,1»
:
.
______ :— Higher sPercent:

Rpcenotions
■■ "■1
— —~—
SinSl o ; M a r r ^ ;
person* couple ’ ^

»Combined normal tax and surtax
Surtax n e t ,income
T)orre
p
i
se
from
■
•
* *■, decrease from
..,■*■ liyox
j- vj*■ .
.
*X*A
|.
. .
* Amount >^rcum>; ,— ;
— ¿Hr-------- -

(number of income .recipients in; thousands; money amounts in .millions)

$500
$1,000
(p resen t lew 2/)

600
700

Source:

1,200
i,H oo

600
0
0

$5cc

^ S . 5'4 4.6 •
I1-3, s i 6*7

$69,11^*3 ,

—

H.727.3

33 *017*0 ; 10 ,5 2 7 .6 '

9 . 7^
■ 21.7

i

6 0 , 320 *9
. 53 ^ 51*7

Office of the Technical'Staff1» treasury Department*

-

$16,692.0

&.

-

41 , 6 ^5.9

$ 3 ,2 9 3 .’+

12 *0/0

15,0^6*1

15 ,2 6 2 .6

2 2 .1"

1 3 ,6 5 8 .3 .

3 . 033*7
- -

.

v

1/ Tl-i. definition of incono P«Jt»n«<

-

..

-'-X

V

9 *9# 8
IS .2

: j

\ -

p c S J ^ S U K l i S i S ? ? » *

would appreciably raise the amounts of the revenue
s v
ostimrted d0crcaS6s in the ■number -of taxable
to the total tax liability would not bo changed appreciably« .The estimated decreases i . ,
. , r
income recipients would-also be. noticeably larger*

k_

2 / Internal Hevenu.e Code, as amended, by ’the Revenue Act of 19^5m

_ " 1
'

. * - /■
m ;

I

249
■

B.

-

21

*

B ccnohic considerations

1 1,

Consumer market s- "

'". ■

' ■•* •••••:" - • - ' •

’ 'Higher p e rso n a l exem ptions, a t a time o f a c t u a l ■ or. t h r | ^ p A i ^ ^
d e f la tio n , Would tend to b o ls t e r consumer m arkets. : C onversely, ^ n
t n f l a t i o t IS a c tiv e ' or th re a te n s , lower exenn.t.lon* tend to rednco _ .
in f la t io n a r y spending n ro s s u re s . from -the Itrog-ru n .strnid-n-4 n ?, .-p».
î e v e i ç f e s t i o n s should he considered, in th e lt#rht o f -the. r e .lu if e ments o f mass, huyinp newer e s s e n t ia l, to in o .u stria l. p tosp e.ri o'. ,
2»

Incentives

•'

!-

In terms of over-all revenue go,als, higher exemptions'and loi-ep .
rates are competing alternatives.
In the nature of the Problem
upward adjustment of exemptions,' therefore,, means -a,sacrifice of ,;..
.tax rate .relief for -economic incentive purposes*
An increase in exemptions would ./rive the trentest ralatî^v
0f tax relief to the lower income -taxpayer s; Hot much would he
diractlv m i n e d incentive-wise from exemption. increases*. However,
indirectly bv increasing the demand of the mess, of income uarp^ers
for. p-oods and services and providing mere profitable business .
opportunities, upward, adjustment of the exemptions would tencl -to.
.
stimulate, .work and investment incentives*' ■
? '
?rhm the'economic incentive standpoint, the alternative .-to -an
exemption increase is a general rate reduction, especially in the ,
middle and. upper surtax areas.where incentives to worm an- invest
are stated to he most affected V
the' existing, .income' tax .rates.
• In this connection, it is pointed out that .substantial" rate recevions
for upper income taxpayers involve relatively small revenue’ reductions
under the individual income tax.' However, as alroadv indicated, above,
even moderate increases, in exemptions have substantial e f f e t s rn th
revenues*- Consequently, a greater direct incentive effect •can probably
...be. obtained -from rate reductions than from exemption increases,■ assuming the same amount of revenue loss*

3*

S h if tin g o f income; ta x

'

■

:

While as a.general rule the individual income tax probably is not
shifted in the .formmf higher wage rates, there may be importanu
exceptions* • 'Thus, the income taxmay, under some circumstances,
encourage -increased wage -..demands and, in this connection, an uowar
revision-of the exemption-level would tend to dampen demands or wagerate increases.. Somewhat similar results might be expected under a
reduction in, tax- rates., although.differences in the distribution of
tax relief under;the .exempt ion., method, as compared with tax pate changes

might be im p o rtan t’ a s regards the la b o r m arket.

22

C.

Administration and compliance

Administrative and compliance factors have always been considered
with a view to fixing exemptions above the point where collection costs
would be excessive in relation to revenue returns* To some extent the
administrative outlook on exemptions has been modified by the wartime
experience/ The initial difficulties in applying the individual income
tax on a mass basis have been largely surmounted through current methods
of tax payment, namely withholding of tax from wagep, and^ simplified
methods of filing tax returns.:. Nevertheless, a considerable area of
compliance and administrative; problems remains with respect to farmers*
business proprietors, and other self-employed people which would oe
narrowed by higher exemptions». Moreover, the administration of the
W — 2 return system, including computation of tax by the .Bureau and result­
ing bills and refunds to taxpayers, entail an administrative load which
would be measurably lightened if exemptions were increased«» Release of
Bureau facilities from a portion of these tasks would permit more effective
administration of a smaller number of returns. 1j By contrast, a reduc­
tion in tax rates would not offer the immediate administrative advantages
of a higher exemption level *
Do

The broad base concept

low exemptions are..frequently urged to retdin a broad .base* The
objectives o.f the broad base may include any or all of the following?
(l) wider tax consciousness, (2) de— emphasis of nidden taxes or
business taxes, (3) lower individual rates, and (4) preservation of
the revenue potential and administrative machinery for use as the
need may arise*
E*

Relationship of exemptions to deductions and exclusions'

Certain personal deduction allowances, such as those for interest
on personal .indebtedness on home mortgages and charitable contributions,
may serve to remove from the tax base'personal expenditures incurred
to some extent by large numbers of taxpayers* Among other effects, such
deductions may tend.to supplement the personal exemptions in protecting
some minimum living standard from income tax, but are limited to tax­
payers in a position to claim them* The optional 10—percent ‘standard
deduction which imputes a quota of such deductions to everyone automatically
raises the effective minimum of income subject to tax.

1y It should also be noted that while the wartime experience has >
demonstrated that the income, tax can be satisfactorily administered
without disproportionate collection costs on a long—range basis
at very low’’ exemption levels, substantial,shifts in exemption
levels over the short—run, entailing' re— education of taxpayers
and re-adaptation' of Bureau and' employer facilities, would be
disadvantageous from the administrative standpoint«,

v 23 -

Deductions like the unusual medical expense deduction provided
under present Federal law are designed to relieve a comparatively few
hardship cases.
Such, deductions are not as effective a substitute for
higher exemptions as the standard deduction, "because of the high degree
of variation of the^e expenses among different individuals» However,
they servé to.;,make--increased "burdens due to lower exemptions (or higher
rates) more tolerable»
In this connection, it i;s-also interesting to note that under
present law a dependen-t-’s gross income up to; $'5^0 is disregarded; for
income tax purposes* This exclusion tends to raise the -level of family
income which is -free of tax, in thé case of families where children dr :
other dependents have relatively 'small' amounts ■-of income,
F*

Excise taxation

’ '

i:

In view of their impact on low— income taxpayers, the Federal
excises and personal income tax exemptions are closely related.' While
consumers have some option'with regard to their share, of, excise "burdens
"by adjusting their purchases of taxed commodities, 'sané-’Federal excise
tax is included' in'the average; .consumer*•s Vu&g.et... Moreover, Federal
excises which are nut "business* expenses are not deductible by individ­
uals. 'Consequently, higher income tax exemptions and reduction of the'.
excises may be considered fis alternative methods of relieving lovr— income
taxpayers» .Some regard a substantiel excise program as a permanent part
.of the. postwar tax structuré, .serving to take part of the load off individual and "business incomes* Others consider the. incidence of the
excises unfair as bet'wéen high-''and.- Ipwr-income recipients and
arbitrary as bètween consumers with the same, income but different choice
of expenditures.
They also consider the excises damaging to consumer, ...
markets and favor early reduction or repeal, if On the "basis of .the
latter viewpoint,, a higher, -(or. equally high) priority may be attached
to "excise reduction, .as .compared with higher personal exemptions.'
.?•
Irrespective 'of the merits-of the'existing excise taxes-, •there is
the possibility that; in the absence.of an adequate revenue margin*
available for tax'relief, higher personal income tax exemptions may.
têind to'induce still heavier reliance on excise Or 'sales taxes..
Moreover, once increased, it may be difficult to lower exemptions a.s
subsequent revenue- needs arise» Such circumstances might, necessarily
call for additional, indirect tax revenues,

1/ With the possible exception of the tobacco and liquor taxes which
have an important Impact on low-income taxpayers but which are oftpn
thought to be in a special category because of rtheir sumptuary
aspects.

- 2^ -

G.

International comparisons
1*

1J

Canada

ct-

The present Federal income tax exemptions of $500 for single
persons and $1,000 for married couples are lover than the' Canadian
exemptions of $750 for -single persons and $1,500 for married couples,
effective beginning with 1947, 2] The $500 dependent exemption
under existing Federal law is higher than the Canadian, which provides
$300* for dependents not eligible for family allowances and $100
for dependents eligible for family allowances. However, taking accoun
of family allowance payments, ¿5/ the difference in net position of
the average Canadian taxpayer with dependent children as compared
with one without such dependents is closer to that in the United States
than indicated by the nominal amounts of exemption,

■Yv-

2*

United Kingdom

Under British incomer tax law for income years 1942—1946, the
personal allowances wure $320 4/ for single persons (subject, to the
limitation that incomes under $440 were not subject to tax), $560
for married couples, and $200 for dependents, 5/ Beginning with the
1946— 1947 taxable year the British allowances were raised to $440
for single persons {the minimum income subject to tax being raised
to $480) and $720 fof married couples, the dependent allowance was
raised to $240 for 1947-19480 Family payments also help the net
position of the taxpayer with two or more dependent children, §J

l/ See Tables 4 to 4e: (pp* 65 - 7 2 ) for comparison of tax burdens
Under present law in the United States, United Kingdom and Canada®
2/ For the years 1945-1946 the Canadian exemption w'as $660 for a
single person and an' effective $ l v200 for married couples, 'with
a tax credit up to $108 for each dependent, subject to partial
or complete offset where family allowance was received,
3/ Family allowance payments average about $72 .annually per child under
16.
-■:: 4/ British income figures are converted at the rate of £1 = $4,
5J The increase in tax attributable to the reduction in the personal
allowances from prewar 'levels of $400 for single persons and $680
for married couples was treated as a refundable forced savings»
6J Since August 1946 a. family allowrahce of $1 a week or $52 a year
is paid for each child, other than the eldest, under 16 years
of age.

251
--25S-V
S*
,~j

.

:

«

Special •problems

*irixad:‘
-income' ainh-other .
-special', groups ; ’ "

!

^ 1 life econbmic "position: off various "spejpial groups', such as annui—
y tarts"1pr other 'pecipien'to' q £* jlowf, ,fixed .incomes, elderly ‘or hahdi— ‘
t ca|>p>èà' peinons,' and related groups, if.or example teacherss Is* also •:
11 k :fabler -¿to-be 'considered. -in.connection .with .the 'desirable:lWel> of
ithpbine^tax exemptions^ :■The major. problem,..raised by- t hose‘(groups' sterna
from the double pressure of higher prices and taies'o'n lotf/ rolati'V'Qly'
f îxéd,f%*ohey‘-incomes* Other -problems may.arise .with.regard to special
personal‘n:£pehdes-^coniiec teci with age. or infirmity^ Jor -diff iculties
of^ëéonotof$ 'read jus tmén t"d;n>,•tfeç'rca se of veterans*. '‘One.’phase -of the
problem arises*: from the fast that- many.such per sons être entitled'billy
to;;thë -f eiati4ely low exemption., of $500 or $1,000. allowed te bi&glê •
pèrsôhsror >
rmârpied^couples -without...dependfnt,s.* ; '/**'_ ..: .4*

'

. ,-c ';b"

- V * .

-

."

■

til "*"i

E.v:.t

: x ' ^

i

Various typés 'of proposals have been. made;, for special; àddituôhàl
exemptions applicable to the aged and ather:,p^|iêulâr’^ o ù p ^ ' p ' One ;Approach is to "provide a special exemption, basei-von ago ^ ,’An. .impbrtant
example -of" thîs approach is the'“provi¿ion. under.H*,R V T, 8Cth Congress,
nhi'irsi -Session,' for a $500 exemption* for' persons over % 5 V ’ l/ Another
approach i's ‘the method of special exclusions'applicable to‘pehsiebi ''
'or/annuity income, 2] Still other proposals, would provlde^ special : J
>
income tax treatment applicable- to-the ciyiliin income. .of 'Yeterahs\r
Proposals ;have alsb beerr.;advànced; which would 'relate ’
special tax^i
relief to -the individual1s occupational status,'for .example;, by pro­
viding higher exemptions against schoolteachers1' salaries^
^ ' aV
Special relief for particular groups tends., to be contrary to
the general principle that the income tax should apply uniformly
5,among similarly "'situated persons* To grant relief on .a special-group
‘■"basis i-n'each instance makes it increasingly ipse* defehsibXe .t'o deny
;it to o'thér groups pressing for ;fayorable. tax..treatment« ■ The censer’• quënce of the- riddling of the-incom© tax with .special exemptions would

1J See the.•Treasury tax study,. HThe Income Tax Treatment of Pensions
and Annuities,15 December .1947, ,:pp. 21-23*
'
2/ Ibid., p p t 20-21.

- 26 -

"b© to make it a loss effective1and. loss, ©etuitable revenue instrument*
Moreover-, as a means of providing special benefits to particular groups,
the income tax exemption method is subject to a number of defects*
Such benefits would not be distributed in accordance with heed.. He
benefit would be provided for persons with incomes already so low they
are not subject to tax. Among persons deriving some, benefit from the
tax exemption, the benefit would be greater the larger the individual 3
income. The largest benefit would go to persons with the least need.
To a considerable extent, the special-group problems mentioned
here would automatically be reduced if personal exemptions generally
were raised. The adjustment of generally applicable exemption levels
would involve greater immediate revenue loss than special relief
measures, but would not entail their objectionable equity features.
Thus, an increase in exemptions would provide relief for low-income
annuitants and *rould tend to minimize, but not solve, unsatisfactory
aspects of the present income tax treatment of pensions and annuities
which have been magnified by the present low personal exemptions.
These difficulties include inequalities arising from the exemption of
certain classes of payments such as Railroad Retirement and Social '
Security old-age and survivors * insurance benefits, as well as defects
in the present method of allowing for the. tax-free recovery of the
capital element in annuities.
It would also help, to decrease demands
for the creation of further exempt classes of pensions and.annuities .
as well âs facilitate covering Railroad. Retirement and Social Security
old-age benefits, into'the tax base,, as already recommended by the
Treasury Department. 1J
■ 2. ■ Averaging
A more liberal exemption allowance is sometimes urged in lieu of
averaging-for low incomes. "The-wastage of personal exemption in years
of low income is bhe aspect of the penalty imposed cir fluctuating as
compared with "stable incomes under a progressive income; tax. Methods,
of assuring full use of the exemption, including averaging and carry­
over provisions,•may be viewed.as.liberalizing.the exemption allowances.
Among the methods which, have been suggested is the proposal by the CIO
and other- labor groups for a two-year carry-forward and two-ye'ar
carry-back of .unused-exemptions® 2/

1/ Ibid., pp. 42-45.
2/ See Revenue Act of 1945;, Hearings before the Committee.on Finance,
79ih Cong., 1st Sess., on H.R* 4309, pp* 106, 125, and 250* The.
2— year»carry—forwar.dand 2— year carry-back of unused •persons^!
exemptions was made- the subject of a bill, S* 2508, 7.9bh Congo,
2 n d ;Sesa*, introduced August 2,.1946 / 'by Senator Taylor0

- 27 -

252

As a partial substitute for the carry-over of unused exemptions,
a higher exemption leyei would tend to. reduce the scope and intensity^
of the averaging problem for low-income recipients in the sense that it
would drop from the tax rolls low-income taxpayers whose incomes, while
variable, were below the higher exemption level in every year« For
the remaining taxpayers with'low, variable incomes it would result in
less tax in the peale income years« Consequently,, such taxpayers would
tend to be in a better position to maintain a minimum standard of
living over a period of high— and low-income years*
In contrast with the carry-over of unused exemptions, higher
exemptions would provide relatively more relief for recipients of
stable incomes than for those with fluctuating incomes« Moreover, in
some respects higher personal exemptions would- aggravate the averaging
problem since the potential loss to the taxpayer due to wastage of
exemption in lovs-income years would be greater« 1 j

To

Revenue flexibility

How should the level of persona,l exemptions be adjusted, und.er
conditions of boom and depression? If exemptions and rates' are kept
constant „ the yield of the income, tax will automatically increase or
decrease in response to increases or decreases in the national income,
thereby tending to adjust itself to the community1s changing capacity
to-p a y 9 2j This automatic revenue flexibility is frequently regarded
as desirable to help check inflation or deflation. JJ
Automatic or built-in flexibility could be increased by provision
for the carry-back of unused personal exemptions. Under such a pro­
vision, individuals whose incomes or wages were reduced below their
exemption levels, because of a slump in business conditions, could apply
for tax refunds»
It is held that’ this kind of tax reduction would be
equitable because it would single out for relief people whose needs
were greatest-, and at the same time put the money in the hands of those
who would, spend it promptly, thus helping to check the slump0 To "b®
most effective, refunds' resulting from the carryback would have to^be
paid promptly« h/ Substantial delay in such payments would result in
their being less helpful in attacking the deflationary forces at a
relatively early-stage of development. At w o r s t d e l a y might result in
l/

2j

■$/

U/

The problems and issues respecting the averaging of incomes under
the* individual income tax will be the subject of a forthcoming
Treasury tax study,
'. ■•
Such yield variations are due to two factors? (l) a.s incomes increase
taxpayers are added to the rolls while as incomes decrease taxpayers
are dropped, from the rolls and (2) the tax payments of existing tax­
payers are increased as incomes rise and decreased as incomes fall.
See, e*g., Public Finance and. Employment, Postwar Economic Studies
Ho, 3, Board of Governors of the Federal Reserve S.3rstem,.pp* Ul-i+3,
and Taxes and the Budget? A Program for Prosperity in a Free Economy,
Committee for Economic Development, Uov. 19^7» PP» 29--30*
To some extent individuals might utilize expected refunds immediately
regardless of delay in actual payment by use of savings or consumer
credit in anticipation of payment.

refunds "being inappropriately timed in relation to changing-economic
conditions. The point has "also bepn made that the -carry-back of unused,
exemptions, unlike a carry-forward, would riot weaken- the-, tax-system,
since it would leave r ates‘and exemptions to apply with full force when
prosperity returned.. Perhaps the strongest criticism of unused exemprtion carry-overs is the great compliance arid administrative difficulties*
the potentially large revenue losses involved, and the fact that.. , .
averaging would not he provided for higher-income taxpayers whose incomes
never fall "below their exemption allowances. 1 /
It has also, been suggested that countercyclical changes in revenue
be obtained by raising‘exemptions to combat slumps'and decreasing; ex- ..
emptio’
ns during periods' of actual or threatening inflection. This type .
■ of proposal is also open to a number of objections, (l) Taking taxpayers
on and off the rolls by means of varying the exemptions would sharply ,
raise and lower administrative peak— load requirements and necessitate
taxpayer re-education to changing exemptions a n d p o s s i b l y , changing
filing requirements.
(?) -"Cnee exemptions were' increased, it would
tend to be difficult to lower them again as revenue needs increased.
(3)
(General exemption changes would not be as selective as would a
carry-back of unused exemptions. Higher exemptions during depressioii. .
would not help the unemployed :^r 0 ther groups whose reductions in
iricome were so severe as to take them off the -tax. rolls- anyway• These •
groups are the ones who would most need and be most, likely to use the
tax refunds,
(ri.)" increasing exemptions when national income is low,
and decreasing them.when national income is high would intensify the
averaging problem by increasing the taxes imposed pri those with
fluctuating incomes compared with the taxes paid -by those with stable
incomes.
(5) A reduction in exemptions in bopm times.,.when the cost
of living would -probably -be higher,•would seem to be. harsh on persons ■
with low, fixed incomes. 1Moreover, it'might not be acceptable to
persons who, after being unemployed or •on reduced incomes during the
slump, would find their taxes increased just when they were, in a
, f
Position to return to a more normal income- level.
.

l/ In 'contrast'1w i t h "the '
.carry-back/ the- carry-forward pi* unused,
exemptions would tend to reduce tax yields as.the economy swung
into- a recovery' period and might even carry forward into the boom,
years.
This would tend to make it more difficult to collect
additional revenue to reduce debt -at a time when the economy could
best afford to make "payments on the national debt. -It might also
reduce the effectiveness of the income tax in checking' inflationary
forces under boom conditions.

253
-29-

Tsrf.ition in. rates to provide added flojdt 11ity »190 has inportant
limitations* The view has .been e?^pqssod. that low tax rates .daring
depression periods would not.readily encourage newinvestment,
perticulafly if the policy of increasing'rates, during bt>om^ipos.is
known to potential investors. .Moreover, substantial, variation
rates nay be a disturbing factor in the investor s outdoor w. ie- *
tend to lead to a lower total of investment rather than a beneficial
change in the timing*

...

"

- ’ '\

From the standpoint of encouraging (or curbing) consumer buying,
exemotion changes would concentrate more effectively .than rate adjust­
ments the tax changes at the lower end of the income scale whore..a.
high proportion of .income after taxes, is customarily, spent, ..However,
neither a decrease in tax rates nor increase in exemptions i«oul.a .be
effective in increasing the disposable income of thosewhose^incomes
drowed below taxable levels, face relief is probably most effective,
in increasing the spending of persons with impaired income, the would
in the short-run be strongly inclined to .use additional funds to resist
curtailment of their.established living standards*. Thus., to the jxtent
a tax reduction applied to persons whose incomes were not Impairc.
depression conditions, it would he less likely to he used
on consumer goods.. Moreover, rate and exemption changes might he
rel«iiy.ely ineffective 'in the ..short-run .in inducing, the mass of con­
sumers to increase or decrease their-'expenditures in response to,
decreases or increases in taxes, if higher taxes were largely offset or
cushioned hy .the-use of sayings or consumer credit’, or tax decreases
used. t.o pay off debt or increase sayings.
IV,

per capita versus differential exemptions^

A.

The issue .

•

t :. y

A major question in connection with exemption revision 4s wh~ th.-T
an upward adjustment should he. mad e on p > straight .per cppitA hi-sas ^or .
,
whether a relatively larger increase should "be made for thé taxpayer
and his spouse than for dependents. A subsidiary question is-what typ e
of differential, if any, should. bevProvided in the. exemption, for .
principals.!/ as compared with depend.ents,
- v
-

Departure from the present typo of per capita exemption system*
would necessarily involve considerable loss of simplification* -However*
a greater exemption for principals than for dependents would provide
relief where it appears to he most needed i?/ with a minimum sacrifice
of revenue.
•
1f

2

J

’

That is, the taxpayer and his spouse*
As indicated by the relative incomes needed to attain a comparable
living standard for different— sized families and othei consumer
budget data Presented above (p> ,w*
-

- 30 -

While per capita exemptions are to he preferred on grounds of
administrative simplicity,' they would involve increasingly great^
sacrifice ©f revenue and equity the higher exemptions-were raise on
a per capita basis* Thus, exemptions ©f $£00’per capita, assuming ^ .
present prices, l/ would probably involve very considerable disparity
in favor of large families which might he regarded as justifying a .
revision of the structure even at the expense of some complication, 2/
Howaver,- at -levels of- $6 00 per capita, the equity, revenue, and
simplification, considerations relating to choice of' exemption method

.

are more closely "balanced,
B,

Consid orations involved

The per capita system affords maximum' simplification of adminis­
tration and compliance fqr-both the Bureau of Internal Revenue and the
taxpayer. Departure from the per capita plan would inevitably, involve
additional- complications. Howevere a considerable part of
D^eser1“,
simplified system could he maintained under certain types of differential
exemptions,.. .These are described and compared with per capita exemptions
on the basis of revenue-, equity, and. administration in the following,
sections.
Under per capita exemptions the single, married, an^
exemptions are in .the rati© 1-2-1. Illustrations: $500-^1 *0004500*
$6004l,200-$600, and’ $7'00-$l ,U00 -$ 7 0 0 ,
Under differential Combination A the single-married-dependent
exemption ratio would be ¿ 4 - 1 .
Illust rat i^hs"$g00-$l ,60O-$U00,
^QOO— $1,600— ^^50, and $1 ,000 —$ 2 *000 — $5 0 0 ,
•Under differential .Combination B, the single-married-dependent
exemption ratio would be 2-3-1* Illustrations! $S00-4l ,20C~$U0O, •
$ 9 0 0 4 1 , 350-4H50., and .$1 ,000 -^ 1 ,50O-$5OO,
_ ,1 #

Revenue and number $f taxpayers

The accompanying table shows the estimated number of income
recipients, their surtax net income and combined normal tax’and surtax
, under various per capita and differential exemption .levels for calendar
year 19 ^ 7 » assuming income payments of $l66 billion.

if To the extent priées and money incomes generally were higher, -exemp­

2/

tions could be increased ©n a. per capita basis without oha-nging
existing exemption situation in substance,
As exemptions are increased the number ©f taxpayers decrease and,
consequently, compliance and administrative problems tend auto­
matically to decrease. This occurs not only because of the
reduction in the number of taxpayers but also bec°use^the remaining
taxpayers are apparently m©re familiar with the handling of recor s
and instructions such as are involved in tax returns,,

Jstimatcd number of taxable income recipients., their surtax net income and combined' normal ta:
and surtax under various exemptions,' in calendar year 19^7
(assuming income* payments of $lS 6 billion) 1/
> Combined- normal tax and surtax:
Surtax net income
Taxable income recipients!
i
■ ! Decrease from
:
Decrease
from
Decrease from
Single [Married
n r osent law
Amount
Amount
*
-present
law
•oresent law
ïDependents » Humber
person ’ cour-le
Amount
i Percent
A
m
ount
!
Percent!
Humber ' Percent!
[emotions

(number of income recipients in thousands; money amounts in millions)
$ 500

$ 1 ,0 0 0
(pro;

$500
it laii

600
700

1 ,2 0 0

6oo

lyUQO

700

300
300

1 ,2 0 0
1 ,6 0 0
1 ,5 0 0
2 ,0 0 0

1 ,0 0 0
1 ,0 0 0

Hoo

Hoo __
500 V
500 V

Hg,5HH.6

U3,Si6*7 U9727*9
3 8 ,017*0 1 0 ,527*6

UH,H76.o H,o68.6

39,^91*6 9,053*0
37 ,3 9 6 .2 il,iHi
29 ,8 0 3 .2 is, 7 UX.U

S*7P
21,-7
S.H
iSo6

2 3 .0

$6s,ilHo3
6 0 ,3 2 0 .9
5 3 ,3 5 1 .7
6 1 ,3 5 0 .5
5 2 ,3 2 9 .1
5 0 ,U3 H .7
Hi, 771*6

$S, 293 *U
1 5 ,2 6 2 .6
7 ,763*6
1 6 ,765*2
IS, 679*6
27 ,3^ 2 .5

$ 16 ,6 9 2 .0
12.#

22.1
11.2
■
2U. 3 .'
2 7 .0

39*6

. -

15soH6«i $i,6H5»9
13,-656,3 3, 033.7
I 5, i 6i a 1, 530*9
13 ,3 3 3 .2

3 ,3 0 6 .8

12.991*9 3*700.1
11,230.6 5,Uxi.U

■9*9$
lSe 2

9*2
1 9 .8
2 2 .2
32. H

M

Source.: Office of the Technical Staff, Treasury Department.
-11j/ mX
,O
_ definition of income payments used here is the unrevised concept.
xuu
See ’National Income
ix
Supplement to Survey of Current. Business, ” J u l y I 9 H '(•
current level of inôomc payments is
substantially higher than the $l66 billion level assumed when these estimates were prepared,
ihe .
higher level of incomepavmcnts would appreciably ra.ise the amounts of the revenue losses involved,
but the percentages of the revenue losses to the total tax liability would not be changed apprécia ,ly<
•The "estima.tod decreases in the number of taxable income recipients-would also be noticeably larger*
2/ Internal Revenue Code, as amended by the Revenue Act of 19^5♦
^
2/ Assuming that married persons filing separate returns would split their exemptions dr-that one
spouse takes the exemption for a single person and the other the exemption for a dependenu.
H/ Assuming the first dependent of a single person would qualify the single person as head of
family* entitled to a married couple1 s exemption*
~

rv>
CJl

- 32 * 1

.2.t-

. ?.. ••.,

As

indicated

in the

table,

e x p i i o n s * of 4 6 œ

.

p e r b f l p i p and

d i f f e r e n t i a l ' C o m b i n a t i o n B, 4 8 0 0 - 4 1 .2 0 0 - ^ 0 0 .. w o u l d h a v e r o u g h l y t h e
san e r e v e n u e e f f e c t . .t h e f o r m e r i s e s t i m a t e d to r e d u c e r e v e n u e
y
a b o u t 4 1 . 6 b i l l i o n , th e l a t t e r b y 4 1 .5 b i l l i o n .
taopntlojis .of >oo0 0
p e r c a p i t a w o u l d d e c r e a s e 'the n u m b e r o f t a x p a y e r s b y h . ^ n i l l i o n .r
1 0 p e r c e n t , while;/Combination 3 w o u l d reduce
or about' $ -percent,-

•“

'‘.

the

number by ^ 1

nillion ■

'

’

Similarly exemptions of $70Q nor capita and differential Combina­
tion A, '
5 gO0 4 l, 60 O-'tUo.0 t i n v o l v e ;roughly the same magnitude- o* revenue
reduction* The former would reduce -individual income tax liabilities
bv about $3*0 billion’or IS percent; the»latter, $ 3*3 billion-or a ou
20 -percent. The per capita system would reduce thè number o., taxpayers bv about 1 0 /5 million or 22 percent from .present law, whereas *he
Combination-A .system would reduce the number by 9 million or.;ft
1 9 percent.;

,- -.

.

*

■* \"

. ■•

' -, ■

T h e o r e t i c a l l y , e i t h e r C o m b i n a t i o n -A et C o m b i n a t i o n 3 / t y p e e x e m p t * ' “ 8
c o u l d b e s c a l e d u p or S o w n . t o p r o d u c e any. .given o v e r - a l l r e v e n u e g o a l .
H o w e v e r , such, a d j u s t m e n t of th e level, w o u l d e n c o u n t e r the- difficulty.tha t a d e p e n d e n t

exemption even

slightly b e l o w yUoO would

result

in an .

a c t u a l d e c r e a s e i n !th e e x e m p t i o n f o r m a r r i e d c o u p l e s w i t h
or more
d e p e n d e n t s , u n d e r - C o m b i n a t i o n 3.
U n d e r C o m b i n a t i o n A, the d e p e n d e n t
e x e m p t i o n : c o u l d g o . s l i g h t l y below, 4 H 0 0 w i t h a n a c t u a l d e c r e a s e o f t o t a l
e x e m p t i o n r e s u l t i n g Onl;>.for m a r r i e d c o u p l e s - i t h 6 - r^.-.ore.dependents.
H o w e v e r , If C o m b i n a t i o n A e x e m p t i o n s w e r e s c a l e d d o w n to o T Q O - o l ,
S 3 5 0 , the e x e r i o t i o n ; w o u l d b e d e c r e a s e d f r o m p r e s e n t l a w f'-rimarriea
couples' w i t h 3

or

dependents*

.

■

.

-.-.'V.

It n a y a l s o b e noted-'that a s s u m i n g a n $ 6 0 0 e x e m p t i o n f o r

single., ...

•p e r s o n s 'and- •$ ¿ 0 0 f o r ’d e p e n d e n t s , C o m b i n a t i o n A, w o u l d.allow-;¿ 1 , 6 0 0 for
married' c o u p l e s a n d r e d u c e .revenu^ by.-an e s t i m â t e d $ 3 . 3 b i l l i o n o r m o r e
than-'twice a s m u c h a s C o m b i n a t i o n B *
married' çouplès.
_• 2 .
>As
more

shown

,

.

^ qui ty con s i d e r a t i o n s

th e " a v a i l a b l e d a t a

standards

of l i v i n g to

on r e l a t i v e

• • ';

corresponds

somewhat

incomes yielding

single p e r s o n s as

married couples/
However,' C o m b i n a t i o n A s h o w s
s p o n d e n c e to' t h e \ i n c o m e ' r e l a t i v e s , -with r e s p e c t
wl t.h Tfri ncipal-s-.

'
••

i n thé f o l l o w i n g t a b l e / C o m b i n a t i o n B

c l o s e l y to

comar-able

'

which'would allow $1,200 for

»

compared with

s o m e w h a t ’-closer c o r r e ­
to d e p e n d e n t s a s c o m p a r e d

255
- 33 Comparison of exemptions under per capita and Combinations A and B,
with relative incomes, for specified family sizes
Married, no dependents = 100/

Exemption sta,tus

Single, no dependents

Exemptions
Helot ivc incomes a / 1
i Combinrtion
: For
•
Diet
J Saving
• 'A x ;
B
:
capita.
i
criterion
criterion

.

70

y

50

50

67

100

100

100

100

100

Married, one dependent

127

129

150

125

I 33

Married, two dependents

151

15U

200

150

167

Married, three dependents

172

176

250'

175

200

Married, four dependents-

191,

19s

0
0

200

233

a / Bor explanation of»construction’and source,

K\

Married, no dependents

see Appendix II (pp.

b/ Hot available*
Combination B would provide a greater margin of relief for single
persons for a given amount of decrease in revenue* However, Combination B
is open to the objection on social and equity grounds that it would
increase the tax liability of two persons because of marriage* While the
budget data appear to indicate economies in joint living expenses through
marriage, it might nevertheless be considered undesirable and unfair to
a-djust the marital exemption so as to impose a higher tax on a married
couple than on two single persons with the same combined income* In the
first place, single persons may obta.in some of the economies obta.ined by
nonried persons by sharing living quarters* To a considerable extent,
the lower persona,! budget shown for a, married couple as compared with
two single persons is probably due to household services performed by
the wife and, consequently, there is the question of the desirability of
taxing this kind of real income* Where the wife is employed outside the
home, these economies may hot be ■available* 1/

i/

In view of the resulting unfavorable treatment of married couples
where both spouses .arc employed, the adoption of Combination B might
tend to call for a working-wife credit. For example, in Croat Britain
where the married couple oxcr.rotion is less than twice • that of a
single person, an additional allowance up to a, maximum of $i+l40 is
granted the couple if the wife has earned income.

- 3U -

On the other hand, there are gome factors in the existing income
tax system which may he -.considered as relatively .advantageous to
married couples compared with single persons as a group. These factors
might he.regarded as calling for an jpffsetting adjustment of relative"
exempt ions •in .-favor- of s ingle', persons,. For example, the exclus ion of
a dependent *s .gro s s income•unde r $
•Raises.the effective exemption for
a dependent with income to
Married couples are perhaps more apt
to have dependents supplementing the family income than single persons.
Moreover, where "both husband and wife have income, the couple may
receive (in;addition to the tax advantage of dividing.income between .
husband and wi^e for tax purposes) a. higher standard deduction on a
combined income above $5»000 than a single person with the same
income. 1/
.
3«

Burden distribution g/
a.

Comparison jyf individual liabili ties under $ 60 0 '
per capita and Combination 3, -^SQOy^l,200—$H00 3/ •>

Two major points should be noted:
(!) Combination 3 would be more
favorable than SoOO per capita to single persons with no dependents,
equally favorable for married couples with no dependent^, and less
favorable for,married couples with dependents, and (2) Combination 3
would involve a reduction in exemption from rrepent law for married ...
: couples with more than twh dependents.
..
, ; In the case of married,couples with no dependents,
per capita
and .Combination 3,. '*0OO~$1,200-3^00, would result in identical, burdens.
Bach method wkuici increase the exemption, $200 everpresent law and' •
reduce liabilities,by $3$ for taxpayers with incomes in the first sur—
tax bracket.- (Tables 5^» 5C .and-pa, pages 77-SO and S6.)
•

l/ The standard deduction is.10 percent of adjusted gross income, the
maximum standard deduction being & 5 0 0 . ' Fowever, the maximum combined
standard deduction 1,3 *1,000 for the couple filing separate returns
•as a g a i n s t f o r the single person.
2 / A detailed comparison of individual liabilities under present law
and a number 0 ^ alternative exemption systems.are presented in
Table's 5 to
(p p . 73“^ ) *
3 / See Tables 6, 6a, 6b (pp. 6 5**87) for a comparison of individual
- . burdens under exemptions .of ;$60Q per capita-.and Combination B, $800¿1,200~SUOO assuming present law ra,tes.

256
- 35

For single individuals with no dependents, Combination 3 would .
provide an $800 exemption as against $600 under the per capita metnod,
resulting in a. tax difference of $38 f°r taxpayers with incomes in
the first surtax bracket * For such taxpayers , $600 per. capita would
reduce the tax by $19 as compared-with present law while Combination 3
would .provide a reduction of $57*
(fables 5» 5a » and :6, pages 73*
»

7p

and

85*)

,The differences are more-striking in the case-of married couples
with two dependents* Here $600 per capita would provide a total
exemption of $2,U00 as against $2,000 under Combination B and under
present law. The tax difference ■between the two proposals would
amount to $76 fop taxpayers with incomes in the first surtax bracket,
reflecting the fact.that, for such taxpayers $ 6 0 0 per:capita would
reduce the. liability by $76 from, present law. whereas Combination B
would provide no reduction: in tax from present law. .. (Tables 5d9 5 e
and 6b, pages 81, 8 3 * and 87«)
It should also be noted that $600 per capita would provide
progressively higher exemptions for larger families-, whereas Combination
3, $800-$13200^-$SoO, would' result in progressively less exemption and
higher tax as compared with present law for married couples with three
or more dependents,
b, , Comparison of individual liabilities
under $700 ner capita and Combination A ,

$8o o ~$i , 6oo~$~Soo

Tr

It* is import apt to note that (l) Combination A would b.e more,
favorable than $700 per capita to both single persons with no dependents
and married couples with no dependents but less favorable to married
couples with one or more dependents, and. (2 ) Combination A would -hot,
involve an actual reduction of exemption from present law except for
married couples with more than six dependents.
For both single individuals with no dependents and married couples
with no dependents, Combination A.3 $800—$1,600—$U00, would provide
higher exemptions and greater relief than $700 per capita.* Tne tax
difference between the two methods would be $19 in the case of single
persons with no dependents and $3S in the case of married couples with
no, dependents, assuming income in the first surtax bracket» Beta would
afford substantial relief,as compared with present law.
(Tables 5 to
5c, 7 and 7 a , pages 73~80, and 88-89»)

\j See Tables 7, 7a, 7b (pp„ 88-90)

for a -comparison of individual
burdens und.er exemptions of $700 per -capita and Combination Aj
$800~$1,600-$^005 assuming present- law. rates-»
■

-36> Foi-'married 'Sow&oa >*itfc tw> dependents, $700 per* capita, would
provide a total exemption of $2,800 as. cornered with $2,UoO nador
Combination A, $S004l,600-£toO,vand $2,-000 under present law. ..hue, .
for' such taxpayers, $700 per capita would reduce the tax V *1>~ f-rm-•
present'law,'as afcpinst e-$76 -reduction under. Combination A, assuming .
income'within the first suptax bracket*
(Tables-5d, 5« and 7b, paRss.
SI, S3, and 90.)

J

-

In'addition, it is-significant: that, the ^ O Q p e r ¿ ^ P j £ an
is progressively- more- favorable- than ComMnatipn^A,;y S O O - a *bOO-vWO^ ...
for"'larger f a m i l i e s W h i l e -Combination A, $S00~&L,6 0 0 - ^ 0 0 5 ^onld .pro­
vide some exemption increase- over present-law for family statuses pp to
married, .six dependents, the- increase- would .he,..smaller tne larger^he
family 6.' For married couples with six dependents Comhination A, .$£0%-.
$1 *600 ^$U 0 0 ,'would allow a total exemption of $U,0C<V tne same .-.as
present; law, hut for.-larger families it-would result ia i m actual decrease in. the total.exemption as compared with present law«,
A*

Comaliance. and administ rat ion

The per capita exemption, system has-made a namher: of important,. ^
contributions to income tax-simplification,, :Briefly stated, .t„e „per •,
capita system: (a) streamlined and simplified the .use of tn©:'Supplement. T and withholding tables, if (h) eliminated the .rouble
some head-of-family status, -(c) avoided need of prorating exemption
in case of intra^.annual change, in marital -status, „and (d) provided the
basis for simplified filing requirements„
While both.Combination A and Combination B would provide, exemptions
Which were in all oases a multiple of the dependent-exemption so-that .a
streamlined tax table "Would be possible, each would have- disadvantages.
Combination-A would -raise a'hbad-of-family problem since it would pl-ow
more exemption for a married couple than for a single Person maintain­
ing a household for a dependent. While Combination B would ,avoid .the .
head-of-family difficulty, it would entail complications in connection
-with separat e returns- of husband and wife, as well as a .prorating- pro
'*
in case of intra-annual change in marital -statusu Both of. these

i f -The Supplement T table is used by the majority, o f - t a x p a y e ^ fil+ng
'-

Form. lOUO- returns * It. is also used by the Bureau in comput ing .np
n > tax of wage earners ■filing Form WU2 returns» According to .-a,...a ..-i
for 19 UU, of'a -total of H 7 S1 million individual income .tax returns,
for 19UU, 1 S 6U million or 39 percent were Forms W-2., Another 1
million or bo percent' were Forms lOHo, using the Supplement T table
to determine tax. Thus* only about 9»7 million returns (about
. 21 percent of the total or one-third of all Form 1040 returns)
- involved .arithmetic -computation of tax.
,

257
- 37 -

? |

difficulties stem from the; fact that Combination B would allow the
married couple a smaller combined exemption than the total for two
single persons. For the sake of convenience, per capita and differential systems A and B are compared in greater detail with respect to
the major points of compliance and administration in the following
table, 1f
On balance, it appears that Combination A would involve less
difficulty from the compliance and administrative standpoint than
Combination B, This conclusion is based on the considerations that .
the problems connected with separate returns of husband and wife
under Combination B would be more serious and affect more taxpayers
than the head-of-family difficulty under Combination A.
In addition,
the scope of the prorating problem under Combination B, arising •
in case of change of marital status, would be greater than under
Combination A where it would be limited to marriage (or separation)
of persons entitled to be family heads. Moreover, filing requirements
both for returns and declarations of estimated tax would be somewhat
simpler under Combination A than under Combination B.

1/

A possible variation of Combination B would be the following’
(l) allow the single person an exemption of, say, $800; for the
first dependent of a single person, $4-00 (in fact, any amounts of
single—person and first— dependent exemptions would be suitable,
provided their sum equals the married— couple exemption); for each
subsequent dependent , $ 6 0 0 ; and (2) allow the married couple an
exemption of $1,200, with $600 for each dependent« From the
standpoint of individual burdens, this plan would be the same as
$600 per capita, except for the single person with no dependents
who would receive the relatively higher exemption characteristic
of Combination B, This suggestion would retain the general form
of the present Form lOUO tax table, with the addition of a special
column for single persons with no dependents. This might permit
the present simplified method of translating family status into
exemption amounts or relating it to the proper column, in the tax
tablé fqr all married taxpayers and all single taxpayers with
dependents,' However, it would involve special instructions and
compliance and administrative difficulties in connection with the
special $800 exemption (tax table) column for single persons with
no dependents,
In particular, confusion and enforcement problems
would arise in connection with the $800 exemption allowance for
single person's with no dependents as compared with $600 each for
married persons with no dependents filing separate .returns,
However, in this respect the proposed variation; might involve no
more difficulty than Combination B,

Comparisons of per capita and differential exemption systems with
regard to administrative and compliance considerations

'Pfbl)lems~“ rpP5hlein"*of:
Exemption
method

Streamlining and u s e [ Kead-ofof Supplement T and , family
withholding tables. ¡problem

Per capita

Satisfactory

Combination Â
(e.g., $800$l,600-$hö0)

Tables could be
streamlined, with
single-column head­
ing. However, use
of tables would be
more difficult b/

j>:one

Yes cj

: connected «prorating :
>with separate *in case of*
■ returns of /Change in *
* husband and ? .marital
9
i
.wife; status
i
Hone

Hone '

•"

Hone

Yes, if
head-offamily
.status
provided
d/ e/

■'

Combination B
(e.g. ï $800$l,200-$400)

Tables aould be ■
str eaml in ed ■w i th
single-column head­
ing. However, use
of tables would be
more difficult b/

Footnotes on next page,

Hone

Yes h/

Yes
i/o f

Filing requirements
for income tax
returns and ’
declarations cf
estimated tax

Satisfactory a/

Other problems

Hone

.Same as per capita with *If head-o'f-family
status automati­
resnect to returns,
cally allowed for
Would tend to require
first dependent,
additional tests to
determine liability for administrative
filing declarations, fj problem of pre­
venting claims for
.'¥culd. raise new
problems with regard to head-of-family
reporting cf dependent’s status on separate
returns of husband
income jg/
ana wife
Would necessitate
different filing
requirements for
returns based on mari­
tal status. Would in­
volve more tests than
either per capita ei*
• Combination A to determine liability for
filing declarations. ¿J
Would raise new problems
with regard to reporting
of dependent *s income jg/

Administrative
problem of prevent­
ing both spouses
from filing sepa­
rate returns as
single persons

Comparisons of per capita and differential exemption s7/stcms with
regard to administrative and compliance considerations
Footnotes

rj. one test, $500 gross income, for filing returns.
b/

cj

d/

cj
:•

fj
g/
h/
*

ij
jj

*

Two additional tests to determine liability
for filing declarations:
(1) wages subject to withholding in excess of $5*000 plus $500 for
each exemption other than the .taxpayer*s own and (2) other income above $100.
Under present law, the taxpayer or the collector counts the number of names listed on the
return and finds the corresponding columns on the tax table* Under Combination A or B, it
would be necessary to count or add up exemption units or dollar amounts of exemption and find
the corresponding t c column.
Would’accord less exemption for dependent than for spouse. Three alternatives for meeting the
problem are:
( l ) d e n y head-of-familystatus, (2) allow head-of-family status as. defined under
p r e - l ^ U law, <and (3) allow head-of-family status automatically for first dependent.
Hone of
these solutions would be entirely satisfactory.
Marriage of persons entitled to head-of-family status would involve some loss of exemption
(equal to the 'amount of one. dependent exemption whe£e only one family head was involved and
two dependent exemptions where two family heads were involved).
Alternative methods of handling the problems include: " (l) prorating as under p r e - 1 9 ^ law,
: (2 ) st,atus r4 cterminatipn^ favorable to the taxpayer in all cases, (3) status determination
date favorabld1to' the taxpayer in some instances and unfavorable in other instances, depending
. on the da.to of change of marital status.
•
Tests for wage« subject to withholding would need to be.related specifically to marital (or household) status, ¿as well as to number of dependents.
■ If dependent’s income test were geared to dependent exemption, this amount would differ from
minimum filing requirement. .
,
• 7 •
Would, require unequal division of exemption between husband and wife filing separate returns,
and using the table method of computing tax. This would necessitate, special instructions and
an additional column on the Supplement T table for the spouse talcing the smaller exemption.
Marriage would involve some loss of exemption (equal to^ the amount of one dependent exemption),
Tests for wages subject to withholding .would need to be related specifically to marital status
and joint or separate filing by husband and wife, as well as number of dependents. .

- *tO 5«

T ech n ical problems
-a .

Depend ent ! s income

In th e event o f-a n in c r e a s e . in th e exemptions on e ith e r a p er c a p ita
o r d i f f e r e n t i a l b a s i s , i t may be d e s ir a b le to re-exam ine th e treatm ent
o f a dependent’s income, now d isregarded f o r ta x purposes up to $ 500 . !_/
The q u estio n i s a ls o r a is e d w hether, under d i f f e r e n t i a l exem ptions, th e
income t e s t fo r a dependent should be equal to th e minimum f i l i n g
requirem ent (presumably equal to th e s in g le person -s ’exemption) or th e
dependent exemption*
b,

F ilin g requirem ents .

In -co n n e ctio n with exemption r e v is io n , i t may be d e s ir a b le to
co n sid e r th e p o s s i b i l i t y o f r e l a t i n g th e f i l i n g requirem ent to* m a rita l
s ta tu s in o rd er to e lim in a te some n o n taxab le r e tu r n s , 'D iffe re n t f i l i n g
requirem ents f o r s in g le persons and m arried couples were a fe a tu r e o f
p r e -1 9 ^ - law . Under Combination B , f o r example, i t might be n ecessa ry
to in trod u ce f i l i n g requirem ents o f $$00 f o r s in g le persons and $ 1,20 0
o f combined income o f m arried couples in o rd er to ensure f u l l re p o rtin g
o f income without e x c e s s iv e nontaxable r e tu r n s , 2y
V,

A lte r n a tiv e adjustm ents in l i e u o f h ig h er .exemptions

W hile exemptions a g a in s t income have been a t r a d it io n a l fe a tu r e o f
th e F ed eral income ta x , v ariou s a lte rn a tiv e .m e th o d s a r e a v a ila b le fo r
r e lie v in g low incomes o r ta k in g account o f fa m ily s t a t u s . Such p o s s ib il­
i t i e s in clu d e ( l ) c r e d it s a g a in s t tax» ( 2 ) low s t a r t in g r a t e , and
( 3 ) minimum ta x a b le income l i m i t ,
These a lt e r n a t iv e s a r3 b r i e f l y
d iscu ssed below .
£ T One su g g estio n i s to r e q u ire th e ta x p a y er t o ■■ inclu d e on h is own retu rn
any income re ceiv e d by a dependent claimed f o r income ta x pu rposes,
2 / Under Combination B , exemptions o f $$00-$l,200-.$U 0Q , f o r example, a .
f l a t f i l i n g requirem ent o f $$00 would perm it one spouse to claim an
$$00 exemption w hile th e o th e r would not be required to report^amounts
up to $ 7 9 9 , which would r e s u lt in an e f f e c t i v e exemption o f $ 1 ,599#
as compared with th e $ 1 ,2 0 0 exemption accorded m arried co u p les. On
th e o th e r hand, i f a. f l a t f i l i n g requirem ent o f $U00 were introduced
to avoid t h is problem , .it would r e s u lt in an u n n e ce ssa rily la r g e
numb nr o f no nt axab le r e t urns e
3 / S t i l l o th e r a lt e r n a t iv e s in clu d e van ish in g exem ptions, r a t e d iffe r e n ­
t i a l s f o r fam ily s ta tu s ., fam ily allow ance payments, and deductions
which a re c lo s e ly r e la te d to fa m ily circu m sta n ce s, A ll o f th e methods
here-m entioned have been used., a t one._ tim e o r m o th e r in variou s
c o u n trie s o r th e S ta te s ., Tax c r e d it s are now used under the income
ta x in 5 S ta te s ? Arizona., Ipwa* Kentucky, M innesota, and W isconsin.
.E f f e c t iv e beginning w ith 19^7 incom es, Canada has abandoned-, th e
p a r t i a l use o f ta x c r e d it s and returned to th e method o f allow ing a l l
income ta x exemptions in th e form o f deductions from income,

259
A,

Tax c r e d its in lie u , o f exemptions
1.,. .D e scrip tio n o f p rop èsa!

, *

•

•• ’

'

In ty p ic a l. form, th e ta x c r e d it prop o sai would s u b s t it u t e f o r a
given .exemption a c r e d it ag ain st tax. equal to ' t h e - s t a r t in g r a t e tim es
th e amount o f such exeirrotiòh-, ' Under such a p ro p o sa l, th e p resen t
$500 p e r c a p ita exemption would*be;;rep la ced with a $95 per- c a p i t a 'c r e d it
a g a in st tax.*, • The normal 'ta x and s u rta x r a te s would th en begin to apply
w ith th e f i r s t - d o lla r' o f net income*
.... 2* ...M ajor e f f e c t s

\

-

;

■M

The s u b s tit u tio n .o f ta x c r e d its fo r. exem ptions would (a ) in c r e a s e
revenue wit hout in c r e a s in g th e b rack et r a t e s , p e rm ittin g h ig h er
e f f e c t iv e exemntion le v e ls o r lower r a te s with th e same revenue g o a l,
(b) in c re a s e the-bu rden on la r g e r as compared w ith sm a lle r fam ily
‘
u n it s , t h is -e ffe ct- b e in g 'p a r tic u la r ly s ig n if ic a n t f o r th e middle-incorne
groups,,: and (c ) m ake-p ossible a'new ty p e o f Supplement •T ta b le *
a,

Revenue

. '■

V

I t i s estim ated th a t ta x c r e d it s o f $95 p er ca n a ta In l i e u o f. th e
present, .exemptions -of $500 p er c a p ita , w ith no o th e r change' from'
p r e s e n t'la w , would in c re a s e income ta x revenues by about S 6H3 m illio n
a n n u a lly , assuming $1-66 b i l l i o n income payments to in d iv id u a i? * Of
t h is t o t a l, in c r e a s e , -about $6H2 m illio n would be paid by anproxim atelv
kg ,5 m illio n in d iv id u a ls alread y ta x a b le under p resen t law , w hile
about $1 m illio n would be paid by about 91 ,0 0 0 new ta x p a y e rs , with
net incomes above ■ $2,-000, 1J added to th e . r o l l s under th e proposal«
About 49 p erce n t o f - th e in c r e a s e 'in revenue would be p aid -b y in d iv id u a ls
w ith net incomes under $ 5 *0 0 0 ; about 5.1 p erce n t,- by th o se w ith net
incomes above $ 5 ,0 0 0 * .......
.
'!
_ '
■
\
. b* Burden d is t r ib u tio n
:
.

A comparison o f amounts and e f f e c t i v e r a te s o f in d iv id u a l
l i a b i l i t i e s under p resen t law and*under ta x c r e d it s o f $95 per c a p it a ,
fo r v ariou s fam ily s ta tu s e s and s e le c te d amounts o f net income, i s
p resen ted in T ables g, ga and gb„ (Pages 9 1 -9 3 *)

1]

P et incomes above $ 2,000 would be s u b je c t to h ig h er than f i r s t b ra ck e t
r a te s i f th e ta x b e fo re c r e d it ap p lied beginning with th e f i r s t d o lla r
o f net ingoine» Por such,incom es a $95 c r e d it would be equ iv alen t to
l e s s than a $500 exem ption,.* Por example, a .married couple w ith fo u r
dependents re c e iv in g $ 3*000 nèt income is not s u b je c t to ta x under
p resen t law," Under th e ta x c r e d it p la n d escrib ed h e re , with p resen t
law r a t e s , t h is fa m ily would pay a ta x o f $19o T his i s due to the-.f a c t th a t th e ta x saving from, each o f th e l a s t two $500 exemptions
i s $ 10 U , 5 0 , computed a t th e p resen t second su rta x b ra ck e t r a t e o f
' 20,-9 p e r c e n t, as a g a in st $95 tax, sav ing f o r each exemption under th e
ta x c r e d it p la n .

As shown in the t a b le s , the $9p p er c a r i t a ' ta x c r e d it would r e s u lt
in s ig n if ic a n t in c re a s e s in in d iv id u a l burdens, under e x is t in g - r a t e s and
a s h i f t in r e la t iv e burdens aneng d if f e r e n t groups, As noted in the
•previous s e c tio n ,* i f would in c re a s e th e ta x f o r a ll'; e x is t in g taxpayers
w ith n et incomes -aboyo. $ 2 ,0 0 0 . I t would add to the ta x r o l l s a .number
o f -nersons w ith U et incomes above' $ 2 , r 0 Q-with more than four, exemptions
who a re -not. s u b je c t to; ta x under-■ present law. The a^pepbsal. would not
in c re a s e the ta x o f e x is tin g ' taxp ay ers w ith not -incom es'below $ 2,000 nor
add to the. r o l l s .any in d i vid u al s •w ith 'net incomes below - 2 , 000 .
The fig u r e s in th ese ta b le s a ls o in d ic a te th at--the ta x in c re a s e s
under ta x c r e d it s are g r e a te r fo r m arried couples than fo r sin g le p e r—
sons, and g r e a te r fo r la r g e r than fo r -sm aller fa m ilie s - The in c re a s e s
i n d o lla r amounts' o f ta x are g r e a te r ' the h ig h er the income, but a re
p a r t ic u la r ly s ig n if ic a n t a s a p ercen ta g e- o f n et income f o r taxp ay ers
in the middle b r a c k e ts . The la r g e s t e f f e c t i v e - r o t e in c re a s e shown-.do
3»2 p e rce n t o f n et income, a p p lic a b le t o -a m arried couple w ith two
dependents, receiving- $ 15,00 0 net income ¿ T h is compares withy a . p e r ­
cen tag e-p o in t in c re a se in the e f f e c t iv e r a te fo r a s in g le person with
no dependents re c e iv in g the. same income.
'' .
. '

■

One im p o rta n t;e x p la n a tio n o f the burden changes under ta x c r e d its
a s a g a in s t exemptions i s found in the f a c t th a t the ta x value - f the
exemption, li k e any d ed u ction, i s g r e a te r the higher the income.,
ranging from $95 under the 19 -p e rc e n t s t o r t in g r a te to $^32 f "osder the
8ilo*U5 —p e rce n t top r a t e . Under ta x c r e d it s , the tax saving due to a
g iv e n 'm a r ita l o r dependency s ta tu s i s the sa n s -re g a rd le s s o f income•
Vhether the ta x c r e d it method r e s u lt s in 0, f a i r e r d is t r ib u tio n
-as between la rg e and sm all fa m ilie s r a is e s " th e d i f f i c u l t c g a e s ti'r o f
hew to.' ap p raise ''r e la tiv e a b i l i t i e s to pay o f f a m ilie s .of. d iffe r e n t,
s iz e . However, i t should be' h ated th a t some o b serv ers, re g a rd .p re se n t
exemptions a s in s u f f ic ie n t to d is tin g u is h between the -a b ility to pay
o f a sin g le person w ith, say $ 10,000 income, ■ -as a g a in st a m arried
couple w ith se v e ra l c h ild re n and the same income, i f As compared w ith
p re se n t exem ptions, the ta x c r e d it method woúld narrow the ta x
d iffe r e n c e betw een f a m ilie s o f d if ie r e - ft s iz e and the same income.

0,

S im p !if i c a t ion

-

_

P e r ca p ita ta x c r e d it s could be in corp o rated in to -th e p re sen t typé
of Supplement T ta x ta b le . However, th e 'p o in t has been made- th a t a
change from an exemption to a ta x c r e d it system , inv olvin g a sharp. de­
cre a se in the -„nominal (althou gh not n e c e s s a r ily the s u b s ta n tiv e } amount
o f exemption allowance., might tend to r e s u lt in some taxpayer confusion
and m isunderstanding. - ,
'
l / T h is view .is a lso di sous sed' in the Colwyn Committec Report
(Royal Commission on the Income Tax, Ureat B r i t a i n , 1 9 2 0 )f p , bO.

2Su
- >3 The ta x c r e d it method would perm it th e use o f a new and more
f l e x i b l e ta x ta b le a p p lic a b le ' to any kind o f d i f f e r e n t i a l ta x c r e d it
com bination*’ Such' a ta b le would cdn-sist o f two columns , one^ f o r
income and' th e o th e r f o r tax. b efo re, ta x c r e d it* In u sin g t h is type
o f ta x t a b l e , th e taxp ayer would read o f f h is t e n t a t iv e ta x from th e
t a b l e , th en s u b tra c t th e amount, o f h is c r e d it to a r r iv e a t h is f i n a l
l i a b i l i t y * ' Compared w ith th e p resen t ta x ta b le , which in clu d es th e
f i n a l l i a b i l i t y without ad ju stm en ts, th e deduction o f _per c a p ita ta x
c r e d it s from a t e n t a tiv e ta x would‘be.m ore d i f f i c u l t f o r ta x p a y e rs ,
and f o r c o lle c t o r s o f in te r n a l revenue in computing and checking ta x l i a b i l i t i e s ' o f tax p ay ers using th e ta x t a b l e . However, t h i s two—
column ta x ta b le ■ would compare more fa v o ra b ly w ith th e p re sen t type
o f ta x ‘ta b le i f d i f f e r e n t i a l exemptions a r e in v o lv ed . The twocolumn type o f ta x ta b le would o p era te th e same way under any type of^
d i f f e r e n t i a l c r e d it com bination* T h is*.a d d itio n a l element o f f l e x i b i l i t y
in th e r e l a t i v e amounts o f c r e d it f o r s in g le p e rso n s, m arried co u p le s,
and dependents would’ c o n s t it u t e a p o in t-to be considered in th e event
i t was found d e s ir a b le to depart from th e per c a p ita exemption system *
B.

.

Low s t a r t in g r a t e

A narrow, low—r a te s t a r t in g b ra ck et h a s,b een d iscu sse d as a means
o f g ran tin g s u b s ta n tia l r e l i e f to low-income persons w ithout
^
.
n e c e s s a r ily changing th e ‘exemption s tr u c tu r e * Under such p ro v isio n ,
th e p resen t $ 2,000 f i r s t b ra ck e t might be s p l i t .into fo u r $500 B r a c k e t s ,
'two $1,0 0 0 b r a c k e ts , o r a $500 b ra ck et follow ed by a $ 1 ,5 0 0 b r a c k e t,
A s p e c ia l low s t a r t in g r a te i s c h a r a c t e r i s t i c o f th e B r i t i s h system . 2/
A low—r a te s t a r t in g b ra ck e t would ea se th e impact o f the income
ta x and p rovid e r a t e graduation a t low-income l e v e l s . Under the. p re sen t
type o f r a t e sch ed u le, p ro g ressio n a p p lic a b le te incomes f a l l i n g e n t ir e ly
w ith in th e f i r s t s u rta x b ra ck et i s lim ite d to p ro g re ssio n of. e f f e c t iv e
r a te s on n et income b e fo re exemption* I n ’ t h is im portant a r e a , which
in c lu d e s ’ th e g rea t bulk, o f th e taxp ay ers and mere .than h a l f o f th e ta x
b a s e , no p ro g re ssio n i s provided- w ith r e s p e c t
th e b ra ck e t r a te
a p p lic a b le -to net ta x a b le income a f t e r p erso n al exem ptions, .By c o n t r a s t ,
th e re is a m u lt ip lic i t y o f r a t e b ra ck e ts a t higher, income le v e ls where
th e re a re r e l a t i v e l y few ta x p a y e rs. Under th e .circu m sta n ce s, some
students o f ta x a tio n b e lie v e there may be co n sid e ra b le merit, in in tr o ­
ducing mope r a t e graduation f o r low-income taxp ay ers in o rd er to. pro­
vide a more p ro g re ssiv e ta x d is t r ib u tio n ampng th e g r e a t m a jo rity o f .
taxp ay ers*
‘1 7

2J

s ir n iia r tw ’-coiumn t a x T a b l e ”’could* b e *c o n stru cte d under th e p resen t
exemption system which would be a p p lic a b le to '.eith er th e a d ju sted
g ross income a f t e r deduction o f exemptions o r to net income a f t e r
deduction, o f exemptions and allpw ablo. de^’S p-tions*
Under th e B r i t i s h income ta x f o r 19^7—^-$, th e f i r s t $200 o f ta x a b le
income a f t e r exemptions and allow ances is s u b je c t to a 15 —p ercen t
■ r a te and. the next $700 i s ta x a b le a t $ 0 p e r c e n t, th e b alan ce being
s u b je c t to th e standard r a t e o f ^5 P e r c e n t, See B r i t i s h Finance
(Ho* 2) A c t, 19^5*
X

■ Iiv -th is co n n e ciio ii, the f o il-w in ^ : f a c t s arc s i p i i g c j a t . a .
i l 6 S 'b illio n o f ia c o Q o S a v a n ts i t is - e s t in a t e d 'th a t the f i x « s
b r a c k e t: ‘ under P rese n t law, weulfi account f o r alm ost >50 h x l l n n .•?
7 ? vercc.ot of th e . total' S’x rta x ne-t inc-ono of , 569 billion, aad ahou.
59 billion Or 56 nercont p? the- total normal "sjc- 9Br|ax
1 ® o' s
*17 billion, Moreover, about. 91 million. or- almost 85 percen ..Cx
estimated total of U g i million income taxnayers would have income
falling entirely within the first surtax bracket. These taxpayers
W-Old account for 53 ? billion of the -550. billion o, income in the
first surtax bracket, or 51 percent of the' total surtax nc. income. 1,

Because o f th e bread th o f the tax base, a t , income le v e ls b u s t '
above the e x e m p ti"n s ,, a low s t a r t in g r a te w ould.cost la rg e
o f revenue. F o r example* a s t a r t in g r a t e o f 10 n e r c - - n a n - ; i a. the f i r s t *500 o f su rta x net incone w ith no o th e r ch a n ^ ^ x ro n n resen ^
law would reduce revenue about $ 1 .9 'b i l l i o n , assuming I-- • 11
tr
income payment s . T h i s i s ' la r g e r than the &1.6$. 'bi.H ion d®crease ^in
re v e n u e 'r e s u ltin g from an in c re a se in exemptions to i>b.C0 ^ r e s m - a .
The - r - n o s a l would a lso in v o lv e a number o f compliance and
a d m in istra tio n Problem s, ( l ) I t would- encourage s e p a ra te re tu rn s a .
low-income l e v e l s , a g g ra v a tin g problems connected w ith community
n r oner t v ’ and, to a l e s s e r e x te n t, income—s p l i t t i n g f o r ta x .
*'»*•
(?)
A la r g e r number o f re tu rn s would be f ile d ,, thereby in c r e a s in g
th e' a d m in istra tiv e work load Involved in hand ling and checking re tu rn s.
( 3 ) Cvebwitkh^lding would be in c re a se d , w ith a d d itio n a l refunds to ©
ad m in istered , where wages v a ried above and below the lo w -ra te b r a c k e t,
(k) .W ithholding by the p ercentage method, used lay a s u b s ta n tia l
number of .la rg e ^erroloyers, would be more com plicated .
C.

Exempting incomes below a s p e c ifie d le v e l

. * I t m y be d e s ir a b le to examine the p o s s i b i l i t y , o f exempting a l l
income's below some: s p e c ifie d amount, f o r example,^ $ 1 ,0 0 0 ,' without
changing the exemption 'allow ance , f e r p erson s s u b je c t to . ta x . ^ ¿his^
would involve a lim it a t io n on the ta x anpli,cable to incomes ju s t above
the minimum ta x a b le income l i m i t to p r e v e n t. the ta x from reach in g or
even exceeding 100 p e rce n t of Income in e x c e s s o f such l i m i t . c~j
A minimum ta x a b le income l i m i t , s im ila r to the method d iscu ssed he*©,
i s used under t h e .B r i t i s h income ta x . J$/.
1 /'H earings-.'be fo re : th.e Committee on Ways and Means on H. T. 1,. Mar eh 13^
~ and lk,. 19^7 , £m. ,c lt..',.. Appendix to , statem ent -of - the. S e c re ta ry or the
T reasu ry, Chart- A / p . 33*
? / A s o -c a lle d .notch lim it a t io n .
*
'
/ '
_T a
3 / T h is minimum tax ab le, lim it was im portant during the war y e a r s . L,i >er
~ the p r e s e n t.,B r it is h incope t a * ; the' minimum lim it h a s -s ig n ific a n c e
only f or s in g le p erson s under ;6$ y ea rs o f ago who-, re c e iv e t h e ir
sm all incomes from investm ents«

-

i+ 5 -

261

Such a p r e v is io n might he u s e fu l, f o r example, to provide
temporary r e l i e f f o r h ard -p ressed , low-income r e c ip ie n t s now e n t it le d
only to one' $500 exemption«. I t would co n ce n tra te the r e l i e f among
low -incom e, s in g le persons w ith no dependents, r e ta in the e x is t in g hase
in su bstan ce, and. n e c e s s ita t e ^ n o n sig n ific a n t s t r u c t u r a l r a v is io n . V'A
major disadvantage i s th e n e c e s s ity fo r a n otch p ro v isio n w ith r e l a t i v e l y
steep r a te s o f ta x a p p lic a b le to each a d d itio n a l d o lla r o f income w ith in
a ra-ngfe o f income ju s t above the minimum ta x a b le income, l e v e l , a . . .
c h a r a c t e r is t ic ' o f such p r o v is io n s , l /
’
.

1 / F o r’ exampl^^'undeT^a'*mini'mum'""taxable 'lim it
7 ^ 0O' net~Tnccm'e",
. assuming present, law r a te s ond exem ptions, a. notch p ro v is io n lim itin g
r the l i a b i l i t y o f low-income taxp ayers to 50 p e rce n t o f income above
•$1 ,Q00 would r e s u lt in a,- 50 -p e rc e n t r a te a p p lic a b le to each d o lla r
.
o f net income between * 1,000 end $ 1 , 30 -» f o r s in g le person s w ith no
dependents. I t ‘would a ls o involve co m p le x itie s in connection with
se p a ra te re tu rn s o f m arried persons*

~

he.

~

APPENDIX I
F u n ctio n and Purpose o f In d iv id u a l Income Tax Exemptions
A.

D if f e r in g views and concents o f the exemptions

One q u estio n is whether somie amount o f income, determined w ith
re fe re n c e to some minimum liv in g standard, should "be re lie v e d o f ta x .
A .re la ted and perhaps more d i f f i c u l t q u estio n i s how to d e fin e such
minimum liv in g standard fo r t h i s purpose* The h is to r y f f the income
ta x r e f l e c t s w idely d if f e r in g views w ith regard' to th ese q u estions»
These d iffe r e n c e s in view point a re not p e c u lia r to the income tax
f i e l d , hut to - a co n sid era b le e x te n t merely r e f l e c t wider disagreem ent-regard ing p r in c ip le s - o f tax-burden a llo c a t io n .

1.

Fo exemptions

At one extrem e, i t m aybe held th a t th e e n tir e income should be
included in the ta x base w ithout exemption* For example, th e'm u n icip a l
income ta x es n^w imposed b7r P h ila d e lp h ia , Toledo, and S t. L ou is provide
n-' p e rso n a l exem ption. M unicipal income ta x ra.tes are low and xthe need
fo r exemptions th e re fo re not comparable to th a t under the F ed era l t a x .'
N ev ertheless', a h ig h -r a te income ta x without exemptions i s sometimes
defended an the ground th a t (a ) the income ta x i s not ne.aessa.rily
confined to a ta x on surplus income a n d 'is in h e re n tly a b e t t e r ta x , w ith
or w ithout exem ptions, than o th e r ta x e s , and (b) some d ir e c t share in
governmental c o s ts should be a p a r t of every in d iv id u a l's budget. In
th is view, any exemption should be s o le ly f o r a d m in is tra tiv e reasons
and to prevent in cu rrin g c o lle c t io n c o s ts d i^ p ro p o rtio n a te to the
revenue inv olved .
2.

The r e la t iv e approach

Another view is th a t the exemption should not be determined w ith
re fe re n c e to given liv in g standards or an?/ other ab so lu te c r i t e r i o n but
should be considered in r e la t io n to the e n t ir e economic and f i s c a l
s it u a t io n a t any tim e. Thus, . i t i s s tre s s e d th a t liv in g standards
should not be regarded a s a b so lu te but as r e la t iv e to n a tio n a l income.
Moreover, i t i s a p a r t o f t h is g en era l approach th a t income ta,x exemp­
tio n s should not be considered independently o f other ta x e s or o f the
kind and amount o f Government e xp en d itu res. One a sp e ct o f t h is
approach i s the su gg estion th a t exemptions should be designed to includ e
some s u b s ta n tia l percen tag e o f a l l income r e c ip ie n t s or fa m ilie s on the
ta x r o l l s and to exclude some p ro p o rtio n , say , o n e -th ird or o n e-fo u rth .
A s im ila r su ggestion i s to f i x exemptions so a s to ensure the in c lu s io n
o f some s u b s ta n tia l fp a c ti^ n of t o t a l income payments in the ta x b a se.
Those who ^a.vor t h is approach a ls o are concerned l e s t a
philosophy o f exempting some .hard and f a s t l iv in g standard may unduly
narrow the inqome ta x base and r e s u lt in a s h i f t of income ta x burden :
to h ig h er bra,ekets where work and investm ent in c e n tiv e s may be im paired,
or in the adoption o f some o th e r l e s s d e s ir a b le form o f ta x . Payment

- H­

o f d ir e c t ta x e s “by most ad u lt c itiz e n s to ensure b r-a d p u b lic i n t e r e s t in the
exo en d itu res a n d the p u b lic d e b t.- The
w~uld tend' t o - r e t a in h ’broad b a se , y et
p ro p o rtio n o f ' in d iv id u a ls and fa m ilie s

3.

M inimum liv in g sta n d a rd .

i s a ls o considered d e s ir a b le
.management o f Government
r e la t iv e a b r o a c h .t o exemptions
r e lie v e , fro m -tax some s p e c if 1.?*
r e l a t i v e l y . l e a s t a b le to nay. 1/
• •,

.

.

.

A c co rd in g -to ’ a w idely a c c e n te d ’ view, the : exemntiyn should be a t .
l e a s t adequate to cover some minimum o f e s s e n t ia l liv in g c o s ts , such
as the amount req u ired f o r reasonable m aintenance. 2 / i t i s conceded
th a t the adjustm ent o f exem ptions t o - l i v i n g C o s t s 'W not be . e x a ct and
th a t under emergency co n d itio n s i t „may be necessary., to go below.,
....
ord inary minima. F o r the long r u n h o w e v e r , i t i s .regarded^ao essen ia
to exempt amounts requ ired to m aintain the in d iv id u a l and h is fa m ily .in
h e a lth and e f f i c i e n c y .
Apart" from hum anitarian a s p e c ts , .th is view i s based on c e r ta in
'p r a c t i c a l s o c ia l and economic c o n s id e r a t io n s ,, Thus, i t ^ i s held th a t
ta x in g substandard lin in g w i l l . r e s u lt in lowered economic y ito A ity
in the community, lo w er-rev enu es, and p o s s ib ly r e s u lt in higher^Govern­
ment exp en d itu res fo r s<>cial r e p a ir s . A ccording to t h is view, ( i£ the
income ta x i s a » su rp lu s” ta x and (b) exemptions are in l i e u of
personal exn en se.d ed u ction s, d isallow ed as a g e n e r a l' ru le 3 / f o r income
ta x purposes. In t h is view, a b i l i t y to pay 'does not commence u n t i l a
■ point i s reached in the income' s c a le where, the minimum means -of l i . e
have been o b ta in ed . .M oreover, ' i t I s held th a t the in d iv id u a l income
ta x would- not serve as a means of- f a i r l y d is t r ib u tin g s a c r i f i c e u n le ss
su b siste n ce was exempted sin ce the .s a c r ific e 'in v o lv e d in going without
•c e r t a in n e c e s s i t i e s i s .n o t . s u s c e p tib le of. measurement or comparison,
-Presumably, accep tance o f such a minimum amount fo r exemptions -waul •
not b ar h ig h er amounts i f révenue needs p e rm itte d .
' l / ,?o r"a d is c u s s io n ^ f some o f ’ the p o in ts ra is e d h e r e , see Harold M.
" Groves ■, Postw ar Taxation and Economi c P r o g r e s s , Committee f o r Economic
Development -Research Study, pp.' l b ? - ! ? 1^ 7
example, Groves s t a t e s :
"A tax system th a t p r o te c ts from ta x e s o n e -th ird o f American income
• r e c ip ie n t s and. between o n e -h a lf and tw o -th ird s o f the Income, o f a l l
r e c ip ie n t s canno't be said to e r r on the side o f harshness» •
2/ v or example, in connection w ith -th e enactment o f th e -F e d e ra l
in d iv id u a l income tax. in 1913 i t was staged in th e Senate: tfrnhe House
framed i t s b i l l upon the th eo ry th a t ^U.000 was a reason ab le amount,
in i t s o p in io n , f o r an American fa m ily 'to l i v e upon,., w.ith a proper
standard o f l iv in g , and t h a t ’ a sum b e lo w 'th a t ought not to be ta x e d .”
Senator W illiam s, C ongressional .Record,- V ol. 50, P a r t-. ; , 63 rd. o. n g .,
. 1 s t S e s s ., August 2 S , 1913. Fo 3 g51*
3 / E x cep tio n s in clu d e in t e r e s t on p erso n al debt or home mortgage,
charitable c o n tr ib u tio n s , .sp e c ifie d p erso n a l tax payments, and unusual
m edical expenses.
. . .

U*

H i h liv in g standard 1j

According to/some .thought , .no Individuo 1 or- fa m ily should be
re cu ire d to nsy income tax- u n t i l income i s ad ©quote to cover L Igh
standards o f n u tr í tien » housing* c lo th in g , m edical c a r e ,' end ^th u r
elem ents o f w elfa re • The co n ten t of such. ; a living-* stan d aru ,
—
tim es termed the American standard, is , n o t .always P r e c is e ly d efin ed .
In p r a c t ic e , however, the d o lla r amounts' suggested by Labor groups
advoca tin g such exemption standards tend to armrr*xinato the F ed era l
income ta x .exempt ions allowed. during the prewar p e rio d . 2 /
•". B .

^uricjtions a f . income ta x exerrot i ps

Whatever view i s taken w ith regard to the s u e d * i c le v e l o f .
exemption which i s d e s ir a b le under given .circu n starj.ees , i t i s g en era l 1J
recognized th a t a number o f b a s ic fu n c tio n s are. performed by the p erson al
and dependent exem ptions. To. th ese fu n c tio n s th e income ta x owes i t s
p r e c is io n and f l e x i b i l i t y as an instrum ent f o r a llo c a tin g ta x .;b u r d e n s . 3/
The severe lis t e d b r i e f l y below* '
1 / '.'tn * l e g i s l a t ivé d is c u s s io n s ' o í the •Fene-ral in d iv id u a l. income ta x -in
~ 1913 i t : was -’urged in the -on sc th a t a d ir e c t ta x - n . in come "aught
. .to leav e fr e e and untaxed as a p a rt o f the income of. ever:* Amoricam.
c it iz e n a s u f f ic ie n t, amount to r e a r and support h is fam ily according
to the American, 'standard, arid to educate h is ch ild ren in the b e s t
manner which the e d u ca tio n a l system o f the country a f f o r d s ."
R e p re sen ta tiv e . R a in e r , Congres g i o nal Rece r d , F d . 3 0 , -p art 2,
63 rd Gong. , 1 s t S e ss. , Hay 6 , ’ 1313» v + " lo Q .
2 / For examnle, CIO r e p r é s e n t a t iv e s .in 19 U3 suggested exemptions' o f ;
~ ¿ 1,000 for single persons, ¿ 2,000 for -married qovoles,
¿500
for dependents '~n the basis of the .Heller Committee health, ano
decency budget of a b o u t -¿3,000 (including taxes)for'a;.wage-earner
family of four.
(Revenue Act of I 9H3 , Roarings before the Committee
on Finance, United States Senate, 79th Cono*. ,-1st Sees., oh
F. R, U 3 OQ, p. 106 .) .-These amounts compare with exemptions of
¿1,000 f^r single persons, ¿ 2,500 for married couples, a n d f b o o f°h
dependents under 1932—1939 lm,JV îfre recently, tne CIO has
re commended exemptions of ¿1,230, ¿ 2 ,500 , and ¿500 for single per­
sons, married couples,.and dependents, respectively,
Cf♦ Report
of the Resolutions Committee, submitted to the Eighth Constitutional
Convention;of' the Congress of Industrial Organizations by the.
Committee on. Re solutions, Ko vember 13—22, 19^6,

3 / Analogous d e v ice s -designed to exempt a minimum standard o f .-Consump­
tio n are a ls o used under v ario u s o'thèr ta x e s , such a s the horsiest cad
exemption under the p ro p erty ta x , the-exem ption of food under s a le s
ta x e s , and s e le c t io n o f'lu x u r y or nonoss e n t ia l item s a s s u b je c ts o f
e x c is e taxes-. However,- th ese d ev ices a re l e s s e f f e c t iv e than the
incom e-tax exem ptions. The s p e c if ic exemptions 'under the Fed eral
e s ta t e and g i f t ta x are te c h n ic a lly comparable to income ta x
exem ptions. Although the e s ta t e ta x a p p lie s a t a much h ig h er le v e l
of a b i l i t y to pay, i t is sometimes held th a t the exemption should
equal a sun adequate at- cu rren t r a te s of. investm ent re tu rn to make
reason ab le p ro v is io n fo r the d eced en t’ s widow or fa m ily .

1.

Exempting'from tax Individuals with .very low incomes

Perhaps the major function of the exemptions is to determine
minimum levels of income subject to tax.. This involves such
important aspects as the point in the income scale where tax begins
to apply, the length of the t^ax rolls, and the size of the tax base.
2,

P r o v id in g . p r o g r e s s io n

1

in eff er.ti v e fraies—

In certain.respects the exemption is like a zero rate bracket.
As such, it results in the application of scheduled, rates of tax to
a higher proportion of income the larger the individuals incomes
Therefore, it makes the effective rate progressive for incomes
entirely within the first surtax bracket and supplements rate
graduation applicable to higher incomes.
• 3 • Taking account .^LXamlly ...status
An important merit of the individual income tax is its capacity
to take account of differences in ability to pay due to family responsibilities. This is the function of exemptions for marital
status and dependents, which allocate the burden as between individuals
with the same net income, but different family status, as well as
between high- and low-income groups. 1/
U,

Exemption changes as a method of adjusting burdens

Increases or decreases in the exemption level have characteristic
effects on the burden distribution. A change in the exemption has a
proportionately greater effect on tax liability the lower the indi­
viduals income, as compared with (a) a reduction in rate equal' to a
given number of percentage points in each bracket or (b) a flat
percentage reduction in tax across the board. 2/
1/

In this connection, it is sometimes held that fixed dollar amounts
■ of exemption which are adequate to distinguish the taxable capacity
of large and small families at lower income levels are inadequate
as between different-sized families with larger incomes. This view
would lead to exemptions expressed as a percentage of income. See
Colwyn Committee Report, Report.of the Bhya.lCommission c m the
Income Tax. Great Britain. 1920, p, 60,
2 j
To illustrate, an additional $100 exemption subtracted from income
subject to the present 19-percent starting rate would reduce tax
by $19. As a percentage of tax this would vary with the individuals
existing tax, ranging.up to 100 percent for individuals dropped
from the rolls. As -applied against income subject to the top rate of
percent,,the $100 exemption would decrease individual liability
by a larger dollar amount, namely, $S6.45, but a negligible per—
\ centage of existing tax. By contrast, a rate reduction of 2
Ipercentage points in each bracket would reduce the tax by about
^10 percent at the lower'end of the income scale and about 2.3
./percent for very high incomes.

- 50 -

DIX I I
Method o f O btaining S-stim ates on R e la tiv e Incomes
'The-follow ing two e x h ib its give a b r i e f account o f ;the Procedures
used by the Rureau o f Labor S t a t i s t i c s in e s tim a tin g r e la t iv e -incomes
needed by f a m ilie s of d if f e r e n t siz e to o b ta in a b o u t'th e same le v e l o f
liv in g . E x h ib it 1 i s a l e t t e r from the Bureau o f Labor S t a t i s t i c s
summarizing i t s a n a ly s is o f savings and d ie ta r y data from surveys o f
consumer income and exp en d itu res- 'E x h ib it P i s a memorandum-fbom the
Bureau o f Labor S t a t i s t i c ^ g iv in g a more d e ta ile d e x p la n a tio n o f the
method and so u rces o f inform ation used.
-I•• .

■Ji

!

264
P
T

Exhibit 1
U. S. DEPARTMENT OP LABOR
Bureau of Labor Statistics
WASHINGTON
(25)
January 17, 1946

Division of Tax Research
Treasury Department
Washington, B. C.

This is to transmit to you the results of our analysis of data on
family expenditures to measure the incomes yielding the same standard
of living among families of different sizes.
Two criteria were selected as defining the same standard of living
among the different family groups, (l) the percentage of^income saved
and (2) the percentage of families having fair or good diets. T’ne data
from the Bureau's Survey of Spending and Saving in Wartime (1941) and
Survey of Prices Paid by Consumers (1944) were used to determine tne
relationship between the incomes at which the savings of families of
different sizes amounted to the same percentage of the Income, The
average relationship among families of 2 or more was found to be.
log y = a + .59 1°S x
Where My,! is the amount of income, and ux n is the number of,persons in
the family. The parameter
is a function of the level of savings.
This relationship does not extend to one person families. The ratio of
incomes of the one person family to the incomes of the two-person family
averaged 70 percent..
The data indicated some tendency for the parameter !,bH, which averaged
*59, to increase with the level of savings. The increase, however, was
not large enough to regard as significant without analyzing data from
earlier surveys, more completely than has been possible to date.
The data from the dietary studies made in 1935-36 were used to determiné,
the relationship between the incomes at which the percentage of good and
fair diets among families of different sizes were the same. The average
relationship among families of 2 or more was found to bes
log y = a + ®62 log x
Where "v1* is the amount of income and Mx H is the number of. persons in
the family. The dietary studies did not cover one person families.

The relative income levels indicated by the two criteria are as follows

Relative income (two-person family ?= 100 )
■ Size of family
Same percentage
of savings

1
2

'

3 ••

. ('

4

70

-

100

100

127

129

151

154 *

.172.

•. 5

6

- • Same •percentage -of
' "good- and bfair diets

/

•

P

/ -

191

176
:

193

' •

The fact that the two criteria led'to so nearly the same relationship
supports the credibility of the results, I trust ..you will ‘regard them as
sufficiently reliable to use in connection with .your current analysis of
exempt ions» The Bureau m i l not be. able to extend the analysis of thefamily size relation during the next few.-months«. The Bureau 1s staff will
be Very glad, however, to discuss with you the methods used in. arriving at
these summaries'.

7try truly yours,

‘ * •

—

■*

- ••

"•

’’

/s / jx* P*

Hinrichs

A* F. Hinrichs
• Acting Commissioner of Labor Statistics

265
53

Exhibit 2
Equivalent' Incomes for Families of Different Size
The'determination of the relative .incomes providing families .of
different size the same scale of living depends op the .definition-pf ■
equivalence in well-being*. The last two decades have; seen a steadily
increasing inventory of survey.data relating one or more aspects of
family living to the amount of family income* These studies range from
detailed information on the need for and receipt of medical care, or
detailed .information on housing, and housing facilities to general
consumption studies covering less intensively all sectors of^family
living", Separate, scales of equivalence among families of different
size might be constructed for each aspect of family living, or a composite
scale could be attempted. Thus incomes could be called comparable which
provide among families of each size the same percentage of families with
adequate diets or adequate housing or adequate medical care; or the. ^
same percentage of families receiving medical care for i l l n e s s o r the
same percentage of families owning various types of durable equipment;
or the same percentage of income spent on food or housing or thu same
percentage of income-allocated to savings* Such indexes of family
welfare can be used separately to measure equivalent incomes or a
rational combination could be devised* The desirability of an indicator
combining several aspects of family welfare depends on the variation
among-separate scales based on different aspects of well-being*
Two separate scales have been developed, one based on the percentage
of families with good or fair diets In terms of nutrition, and another
based on the percentage of income allocated to savings* 'These two measures
of family welfare are probably more independent of each ether than any
other pair that could be selected from the available information*
The data on the percentage of families in each income bracket
having good or fair diets appear in table lb in Miscexlaneous .tublica—
tion No* 452, U*S. Department of Agriculture, Family Food Consumption
and Dietary Levels* The incomes at which the same percentage of families
of the several types achieved good or fair diets were determined from the
table values by interpolation. Five levels were determined, 60, 65,.70,
7 5 , and 85 percent of families with good or fair diets. The incomes at
which each size of family reached the specific percentage with good or
fair diets were then related to the size of lamily and "were found to.be
straight lines on a logarithmic scale. Furthermore thqse linee were
approximately parallel so that it may be conducted that the same relative
scale for different sizes of family applies at each level of the indicator
(the percentage of families with good or fa.ir diets). The average relation
ship found in algebraic,form was as follows -.os; y

+ .62 log x

- 5U -

Where "y " U fa m ily income ' V
le v e l o f th e in d ic a t o r .

i s s iz e o f fa m ily and "a " depends on th e

The data on the percentage of income saved by families of different
size are found in tables 3 and 4, of derial ¥o* R 1818, Bureau of Labor
Statisties, Expenditures and Pavings of City Families is 1944, in table 19,
Bulletin N o ."822, Bureau of Labor Statistics, Family Spending and Saving
in Wartime and in the bulletins cn family expenditures_from the Consumer
Purchases~Study» The incomes at which families of different sizes had
savings or deficits .amounting to the same percentage of income wore
determined from the table values by interpolation. Seven levels were
determined, deficits of 15 percent, 10 percent and 5 percent; no sayings
or deficit; savings) of 5 percent, 10 percent and 15 percent, a s in the
case of the quality of diets, the incomes at which each size of family
reached the specified level on the savings scale were found to-be logarithm
straight lines in relation to the size of family and the lines were approxi»iKitely. parallel. The average relationship was in algebraic'form' —
log y w fit- * *59 log x
where' ny” is; family income,
level cf savings.

%& size

of family .arid •,*a” depends on the

-

that^

The relationships found in these two iruaaures are so similar
a composite of the. two does net appear necessary» Since the other indi­
cators that might be used are probably correlated either with the dietary
indicator or with the savings indicator of equivalent well-being, it is .
.not likely that other radically different scales would be produced by using
this approach to the derivation of a family-size scale of equivalent incomes
It should be noted that the data sumra rized in these relations apply
to non-farm families, olmxlar analysis oi corresponding data for f-^rm
families would yield without doubt a different set of relations»

Table 1
P erso n al exemption. c r e d it f o r dependents, and net income not s u b je c t to s u rta x ,
under the .Revenue Acts o f 1913“ 19^5
:
:
Income
y ear

1913
1916
1917
191s :
1921

Mar „ 1, 1913Dec» 3 1 , 1915
1916
I9 1 7
' i .• ■ 1

1924
1926
19 2 s
1932
193V
1936
19^8
19S0
1941
1942
1944- j>/
19^5

1918-1920

I9 2 I
1922*4923
192H v
1 9 2 5 -19 2 7
1 9 2 8 -1 9 3 1
I9 3 2 -I9 3 3

193^1935
I9 3 6 - I9 3 T
I9 3 S - I9 3 9
I9U 0
l o 4l
19^ 2- 19^3
I9 U 6 -

:
;

P erso n a l exemption and c r e d it
fo r dependents 1 /
M arried
:
S in g le
:
person or : C red ii- r ot
each
head o f
î
person
:
dependent
_ fa m ily 2 /
:

$ 3 ,o co
3 ,0 0 0
1 ,0 0 0
1 ,0 0 0
1*000

1,000

' 1 ,0 0 0
1*500
i , 500

19000
1,000
1,000
1,000
800
750
500
500
500

A
' ’ $200
200

>4,000

4,000

2 ,0 0 0
a,o o o
2, 500. 4/
2 ,5 0 0 5 /
2 ,5 9 0
3 ?50®
2 ,5 0 0
2 ,5 0 0
2 ,5 0 0
2 ,5 0 0
2 ,0 0 0
1 ,5 0 0
1 ,2 0 0
1 ,0 0 0
1 ,0 0 0

boo
boo

4oo
b00
boo
bOQ
■

350
500
500

r Ret income j$/
;
not su bject*
tçn s»srta3c
V

$20 3000
2 0 ,0 0 0
5 ,0 0 0
5 ,0 0 0
5 ,0 0 0
6 sooo
1 0 ö000
1 0 ,0 0 0
1 0 p000
6 ,0 0 0

400
4oO
4-00
4oo
4oo

3,500

!

t
V_Ti
VJÌ
1

btmo

-.

4.000
4 ,0 0 0

4,ooo
—
—

Treasury Department, D iv isio n o f Sax Research

fo o tn o te s on next page.

PO

CO

. T able 1 - concluded
P e rso n a l exemption, c r e d it f o r dependents, and n et income not s u b je c t to surtax,under the
Revenue A cts o f 1913^*19^5
F o o tn o te s :
1/

P r io r to 1934 allow ed f o r normal ta x on ly . For 1931* through 19 U3 and f o r I 9 H6 and subsequent y e a rs,
allow ed f o r both normal ta x and s u r ta x . For 19 ! * and I 9 U5 , allow ed f o r s u rta x o n ly ; f o r normal ta x ,
each taxp ayer was allow ed a f l a t exemption o f $ 500 , p lu s h is sp o u se's a d ju ste d g ro ss income up
and p r io r to th e

Individual

Income Tax A ct o f 1 9 » *, th e p erso n al
^®Pendents; fo r 193 * and subsequent

y e a rs , n e t income a f t e r p e rso n a l exemption and c r e d it f o r dependents.
-nrov^ded
Fnr r e t incomes in excess o f $ 5 ,0 0 0 , p e rso n a l exemption was $ 2 ,0 0 0 , -h e Revenue Act o f 192 P
t h ' t in n o °ca se s h o S d th e r e d a c t io i o f th e p erso n a l exemption from $ 2 , 500 to $ 2 ,0 0 0 o p erate to
in c re a s e th e ta x which would be p a y a b le, i f th e exemption were $ 2 , 500 , by more than th e amou
n et income in excess of $5»000.
In d iv id u a l Income Tax A ct of 19*44.
•

287
- 57 Tatie 2
Recent available estimates of Individual and family budgets and esqsenditures at various levels of living
(annual cost in dollars 1 /J
¡Estimate at prices for ¡
Type of individual or family
¡
S
ì
Single employed
‘Typical
*
5Couple
!
1
:
Source of estimate
individual 2 /
¡Dependént 4 w ith
‘family
Living alone

A.

¡member of a
family
Health and decency level */

of
a family *employed four j/

Budget estimates
1 .Heller« Committee standard budget 5/ San Francisco Average
for
Gross budget
1 9 3 9 - 111
Federal income tax
Budget exclusive of Federal
income tax Jj
2* Heller Committee wartime budget 8/

Heller Committee standard budget
a. A s priced in September 1 9 H6 12/

2,96*
186

I. 33I

2,778

Sept.

19*6
1 ,98*
2*5

3.576
232

1.739

3.3**

2,189
279

3.972

1,910

3,67?

Sept,1 9 * 7

Bureau of Labor Statistics estimate
of D.C. budget 12/
Gross budget
Federal income tax
Budget exclusive of Federal
income tax lk/

Sept,
19U6

300

1 .6 3 8
185
l.*53
Mch.l9 U5

1,68*

23*
i;*5o

6.

Connecticut Labor Department 19/

2.318

San Francisco

5. Ut ah Industrial Commission 1 £/
Utah
Gross budget
Federal Income tax
Budget exclusive of Federal
income tax 15/
Hew York State Labor Department 16/Hew Yo rk
%
State
Gross budget
Federal income tax 17/
Budget exclusive of Federal
income tax 18/

7*

1,098

1.53*
203

Gross budget
Federal Income tax
Budget exclusive of Federal
income tax 1 1 /
b. Adjusted to Sept J.9U 7 by
price index 1 2 /
Gross budget
Federal income tax
Budget exclusive of Federal
income tax

'*.

2.318

6/

San Francisco March
19**

Gross budget
Federal income tax
Budget exclusive of Federal
income tax $]_

3«

1,113
15

Connecticut

Oct.1 9 * 5

1,690

23U

l.*56
Feb.-Mch.

19*6

Gross budget
Federal income tax
Budget exclusive of Federal
income tax

1,*20
1*7
1.273

Expenditure estimates
8.

United Steelworkers' study 2 0 /

9»

United Steelworkers' study 2 2 /
Total expenditures an d taxes
Federal income tax
Balance exclusive of Federal
income tax 25/

United States
steelworkers Sept.-Nov.
only
1 9 U3

Total expenditures and taxes 2 1 /

Unclassified estimate

3.352
Braddock, Pa.

Jan. 19*4-5
3.281 2 V
316 w
2.965

26/

10. National' Lawyers' Guild
Proposal 27/

For footnotes, see pp. 59-62.

United States 19*3

2I4O-6OO2g/

-

58 -

Table 2
Recent available estimates of individual and family budgets and expenditures at various levels of living
______ _______________
(animal aaoUnt in dollars i f )
____________
.
Tyoe of individual or family
< Estimate at nrices for
:
Single employed
»
' Couple 'Typical
individual 2/
»Dependent » w ith 'family
Source of estimate
*
•Living as a» child in 'husband ' of
Date
1
Region
Living alone »member of a» a family 'employed' four
»
family '
»
'
» 3/

I

B.

Maintenance and emergency levels 29/

Budget estimates
1. Federal Security Agency
Dec. 191+2

a. Estimate for 33 large cities 10/
Average
.
Highest cost - San Francisco
Lowest cost - Mobile
b. Estimate for 6 large cities 11/
Average
Highest cost - Hew York,San Francisco
Lowest cost - Houston

225

21+1+
201
May 191+3

2l+0
252
228

Junel9l+3

2* Bureau of Labor Statistics
estimate of MPA maintenance
budget 12/
Average
Highest cost - New York
Washington, D. C.
San Francisco
Lowest cost - Mobile

33 large cit­
ies through­
out the
country

3* Costs of MPA maintenance budget
computed from BLS intercity
index 11/
Average
Highest cost - Seattle
Washington, D. C,
San Francisco
Lowest cost - Houston

33 large cit­ March
ies through­
out the
country

U. Textile Workers' Union estimate of
WPA subsistence budget 1H/

5 textile
manufac­
turing com­
munities

1.673

1,816
1,809
1.807

1.H97

19*15

1,71+1+
1.899

l,gl+l+
l,gl+l+
1 .6 2 3
Jan.-Feb.

I9IA

1.752

Gross budget
Federal income tax
Budget exclusive of Federal Income
tax 15/
5* Heller budget for dependent fami­
lies or children 16/
a. As priced in September 19++6
Exclusive of medical care and
insurance allowances

28

I . 72I+
San Francisco

Sept.

191+6

61+5-655

21/
Including medical care and in­
surance allowances
b. Adjusted to Sept. 19I+7 by price
index 1+1/
Exclusive of medical care and
insurance allowances
Including medical care and
insurance allowances

For footnotes, see pp. 59-62.

IliiftiiUJl111 ;

28/

278-502

11/ ¿2/

Sept,
19*17
708-719

305-551

l,l6l

*+2/
l,2l+2
1+0/1+1/

1,782

1, 9*15 *12/

1,275

1,957

l,36*i

2.136

- 59 Table 2
Receht available estimates of individual and family budgets and expenditures at various levels of living
(annual amount in dollars l/)
* Estimate at
: prices for
î
*
< Region > Date

Source of estimate

8

J
c.

Tyne of consumer unit
:
:
:
¡families
: families :
!Single 5 of two î2-person53-porson *4-person ¡ 5-person ¡ of 6
'persona ¡ or more tfamilies'families 'families > families ¡ or more
8
8
8
¡versons
• persons :
"Break-even" ooint 44/

Exoenditure estimates
1. Bureau of Labor
Statistics'Survey of
Spending and Saving in
Wartime 45/

United
19Ul
States
civilian
urban
consumers

Computed break-even
point (money income
before taxes 46/)
2. Bureau of Labor
Statistics survey of
consumer expenditures jJH/

1/

2/
2/

4/

5/

1.527

1 .4 7 8

1,422

1,777

1.528 W

1.163

1.950

1 .4 9 3

2,155

2,178

2.764

3.363

117

119

77

158

108

146

199

1,280

2,069

1 ,5 7 0

2,313

2,286

2 ,9 1 0

3.562

United
I9UU
States
civilian
urban
consumers

Computed break-even
point (money income
after personal taxes)
Income, poll, and personal property taxes at
break-even point
Total expenditures and
taxes at break-even
point (money income
before personal taxes)

7lH

•

Except where otherwise indicated, federal income tax liability is determined from the tax table on form 1040 for
the appropriate calendar year. for the Heller Committee budgets, the tax takes into consideration the communityproperty law of California.
The data for single persons relate to a woman with no dependents to support, with the exception of the Heller
Committee budget for dependent families or children, which relates to both sexes (see footnote 37).
In the estimates based on budget studies the family typically consists of a moderately active man,wife,adolestent
boy of 13, and preadolescent girl of 8, with the man being the sole wage earner in the family. In the Steelworkers'
I9U 3 and I9H 5 expenditure studies, the expenditures represent average figures for all families covered, the average
family size in each study being computed at 3*76 persons.
The health and decency level is one which approximates what is generally regarded as an "American standard of living
As constructed by the Heller Committee of the University of California, it provides not only for adequate mainte­
nance and protection of health as determined by scientific standards, but takes account of actual patterns of (pend­
ing and allows enough to meet generally acceptable community standards of well-being for the different occupational
groups, executive, "white collar," and wage earner. In the food allowances, consideration is given to consumer food
habits, for exanple, the American habit of eating relatively large quantities of meat. The provisions ifcr housing
are designed to meet standards of size, good repair, sanitary facilities, and acceptable neighborhood. Amounts
allowed for such items as clothing, household furnishings, cleaning supplies, and personal care sire those indicated
by expenditure studies as being generally acceptable. The budget further includes the ownership and use of an au­
tomobile in the case of a family, adeqaate medical care and recreation, life insurance premiums, all necessary
taxes including Social Security (unemployment compensation and old-age insurance) taxes and the California retail
sales tax of 2-1/2 percent on certain purchases, and numerous smaller items. for I9U 2-U 5 the Heller budgets took
some account of wartime exigencies such as rationing, scarcities of many types of consumer goods, and desirability
of investing as much as feasible in war bonds.
The Heller budgets selected for this portion of the table are those for a wage-earner family, presumably repre­
senting the minimum outlay with which a health and decency standard can be achieved. Although the other estimates
shown here vary considerably, they are included under the health and decency level because their allowancesappear
to be substantially closer to the Heller concepts than to concepts teased on the minimum maintenance
emergency
standards set by the Works Progress Administration in 1935 (see footnote 29).
The budget for a single working woman is taken from Wartime Budget for a Single Working Woman. Prices for
San Prancleco. March iqUl. The Heller Committee for Research in Social Economics, University of California, p. 7,
and assumes that the woman lives in a boarding house and obtains her weekday lunches and Sunday meals
(except breakfast) in restaurants. The budget for a family of 4 is taken from another publication of this Committee
Quantity and Costs Budgets for Three Income Levels, Prices for San Pranclsco, March 1942, pp. 92-93.

footnotes continued on p.

60.

- 6o -

270

Table 2
Recent available estimates of individual and family budgets and eiqpenditures at various levels of living
(footnotes continued)
6/

2/
8/

2/
10/

11/
12/

13/

lU/
15/

16/

17/
18/
19/

20/
21/
22/

"2u
2U/

Ayerage tax estimated assuming roughly $50 of deductions* The average of the 3 years' taxes on this basis would
be about $1 2 , and allowance of slightly higher income in the higher tax years would probably not increase the
average tax beyond $1 5 *
Includes savings as follows* for the single workingwoma^i,$50 (for I9 U1 ) ; for the family of U, that represented
by ordinary life insurance premiums of $1 0 5 *
The budget for the single woman is taken from the Heller Committee publication Wartime Budget for a Single Working
Woman, Prices for San francisco. March 19UU. p* 6 , and assumes that the woman lives in a boarding house and ob­
tains her weekday lunches and Sunday meals (except breakfast), in restaurants* The data for the family of U are
from the corresponding study Wartime Budgets for Three Income Levels. Prices for San francisco. March lQUb.
pp* 67- 6 8 .
Includes savings as follows* for the single working woman, $65 worth of war bonds; for the family of U, $295
worth of war bonds and $113 of life insurance premiums*
The budget for the single woman is taken from the Heller Committee publication Quantity and Cost Budget for a
Single Working Woman. Prices for San francisco. September 19H6. p* 1 6 , and assumes that the woman lives in a
boarding house and obtains her weekday lunches and all Sunday meals in restaurants* The data for the family of
4 are from the corresponding study Quantity and Cost Budgets for Three Income Levels. Prices for San Francisco.
September 19H6. pp* 70-71»
Includes savings as follows* for the single working woman, $75* for the family of U, that represented b y $113
of life insurance premiums.
For the single woman the price adjustment was made by multiplying the September 1 9 ^ 6 budget total exclusive of
Federal Income tax by the change in the BLS consumers' price index for San Francisco from September 1 9 I+6 to
September 19^7* The gross budget including tax was then determined so as to yield the adjusted figure after de­
duction of tax* Because of differences in content, such price adjustment in the case of the single woman is not
considered valid b y the Heller Committee, although the adjustment "can be applied to jthe Heller Committee's budgets
for families to obtain a very fair approximation of costs between our pricing dates /except for income taxes/."
(Quantity and Cost Budget for a Single W o r k ^ g Woman. September 19U6. p. 5*)
The price adjustment for a family of 4 was made by the same method as for the single woman, taking into account
the $3,000 maximum on wages subject to Social Security taxes*
Under the price adjustment, bo th the cash savings of the single woman and the insurance for the family of U
(see footnote ll) are each increased in the same ratio as the total budget exclusive of Federal income tax, giving
about $82 and $ 12l*, respectively*
Budget from Estimated Weekly Cost» of a Budget for an Employed Woman in the District of Columbia, mimeographed sum­
mary dated December 6 , l § w , Women's BureM-, U. 8 . Department of Labor* It assumes that the woman obtains all her
meals in restaurants.
"The original budget was set up b y a group of specialists and priced in the District of
Columbia in 1937» The priced budget was modified by_the D. C. Wage Board before adoption. Adjustments of the
modified budget have been made /by the Women's Bureau/ b y use of BLS data." (Ibid.) This budget and the 3 follow­
ing ones are no t conpletely comparable, having been developed to meet special problems in connection wi th minimum
wage rates.
Includes savings provided at 1 0 percent of the cost of the total budget, or about $l6U.
Budget from Estimated Annual Cost of Living for an Employed Woman Living Alone in Utah. March 19U5. mimeographed
summary dated February If), 19^7* Women's Bureau, U. S. Department of Labor. It assumes that the woman eats all her
meals in a boarding house. "The original budget adopted by the Industrial Commission of U t ah in 1939 was based on
prices obtained in various cities and towns in Utah by the Women's Division, Industrial Commission. The 1 9 U 5 figure
is a revised estimate made by the U. S* Department of Labor, Bureau of Labor Statistics, by use of the Consumers'
Price Index, plus the addition of relevant items ..." (Ibid.) These items were Federal and State income taxes not
present in 1 9 3 9 * aad the substitution of a 10-percent allowance for war bonds ($l6s) in place of the 1 .5-percent
"reserve for emergencies." The original budget included premiums for private insurance for which the March 1 9 H 5
allowance is $)*1 . (See also footnote 13* second paragraph.)
Budget reported in Annual Cost of Adeouate Maintenance and Protection of Health for a Woman Living as a Member of
a family Croup in Hew York State. 19^5. mimeographed summary dated February 15. 19U7. Women* s Bureau. U. S. Department of Labor. The budget is from the report of the cost of living for women workers, based on prices ob­
tained by Hew Yo rk in 19 cities and towns as of October 15, 19^5» The budget includes the woman's share of
general family expenses including rent, household operation, and cost of mother's services, and cost of woman's
lunches in restaurants.
From tax table on Form 10^40 for 19^5« Summary shows combined amount of Federal an d State income taxes without
giving each separately.
Includes savings of about $ 1 6 9 and that represented by $31 of private insurance premiums.
Budget reported in Annual Cost of Minimum Budget of a Single Working Woman In Cities and Towns in Connecticut.
March 19^6, mimeographed summary dated February 15, 19^7* Women's Bureau, U. S. Department of Labor, and "based
on prices obtained by Connecticut in eleven cities and towns during February and March, 1 9 U6 , for a woman living
in a single room and eating all of her meals in restaurants." The budget as reported contains the item "federal
income tax (year, I9 H6 ), $188*00." In the budget in the present table this amount is replaced b y $ll*7 , the amount
given by the tax table in Form 10^0 for I9 H6 , and the Social Security tax (l percent) and the total budget are
adjusted accordingly. Ho allowances for insurance or other forms of saving are contained in the budget.
United Steelworkers of America, The Steelworkers in 19U3: A n Income and Expenditure Study of Steelworkers' Families
for September— November,1*19^3« p* 18, Table 25» See also footnotes 3
H above.
Includes total federal, State and miscellaneous taxes estimated at $209 and savings consisting Of $2U5 in war bonds
and $ 3 2 in other forms*
United Steelworkers of America, The Braddock Steelworker* A n Income and Expenditure Study for January 19^5 of
Steelworkers in Braddock. Rankin and Horth Braddock. P a . See also footnotes 3 find H above.
I M 1 - . PP» 31* 32» Obtained by multiplying by 52 the sum of average family weekly expenditures of $57*01 and
Federal taxes of $6.08.
Ibid*. p. 3 1 .

Footnotes continued on p. 6 l.

271
- bl Table

2

Recent available estimates of individual and family budgets and expenditures at various levels of living
(footnotes continued)
25/

26/
27/

28/
29/

30/

31/

32/

33/

34/

35/

Ibid»« p* 33* Includes $384.($7*38 weekly) of gross savings‘for average family, but contains no net savings (or
deficit) on the average after taking account of those families, 45 percent of the total number, whose expenditures
considerably exceed income.
Source does not indicate whether data are obtained from budget or expenditure studies*
Hearings before the Committee on Military Affairs^ House of Representatives, 78th Congress, 1 st* Sess* (S. 1279
et al.y.~ Allowances and Allotments for Dependents of Military Personnel (Sept* 29-Oct. 5» 1943)» PP» 139« 140*
The Hational Lawyer* s Guild proposal also includes an estimate of $ 9 6 0 per year as the recommended allotment for
a wife without children or for one parent if dependent for chief portion of support on the allotment*
The difference between the allowances for a wife alone and for a wife wi th one child is $480. The allowance for
a child where there is no wife is $ 6 0 0 * For each child after the first, the allowance is $240.
The maintenance and emergency levels of family living were originally defined by the Works Progress Administration
in its study, Intercity Differences in Cost of Living, March 1945, 59 Cities, Research Monograph Ho* XII, Washington,
D. C., 1937* The maintenance level budget was made up of goods and services which the Works Progress Administration
estimatedWere needed by a 4-person urban family of an unskilled manual worker living at a level which provided for
bare current costs only, with no savings other than some life insurance* It was stated (page xiv of the Monograph)
that this budget does not "approach the content of what may be considered a satisfactory American standard of living*"
The emergency level was constructed by making percentage cuts in the maintenance level which could be endured for but
temporary periods* This level was recognized as constituting a health hazard if followed over an extended period of
time*
B o t h levels were considered restricted standards by the Works Progress Administration which stated (p* xvii of
the Monograph) nfrom the point of view of the long-time well-being of workers' families, a desirable standard of
living would be one in which the concepts of maintenance and emergency have no place* ** See also footnote 3*
Hearings before the Committee on Military Affairs, House of Representatives, 78 th Cong*, 1 st Sess* (S* 1279 at
al«) Allowances and Allotments for Dependents of Military Personnel (Sept. 29-Cct* 5, 1943)» P* 60» Table 8 *
The data were presented in testimony by the Federal Security Agency and were obtained by applying BL S indexes of
intercity differences to estimates made by the Consumer Income and Demand Branch of the Office of Price Adminis­
tration of the cost of living for a wife and for a child at the maintenance level in San Francisco.
Figures are based on data for a wife and 1, 2, or 3 children, which were compiled by the Bureau of Labor Statistics
and presented on p* 67 of the Hearings cited in footnote 27* The average yearly maintenance costs for the 6 cities
for May I9U3 were as follows»
Wife, 1 child..................... $1,026
Wife, 2 children..................
1,268
1,506
Wife, 3 children.............
indicating that the increases in cost for the 2d and 3d child are fairly constant, about $240.
Estimated Intercity Differences in Cost of Living. June 15. 1943. mimeographed release by the U. S. Bureau of
Labor Statistics. The difference between the highest and lowest cost cities is about 21 percent. The variation
from the average, however, is less than 11 percent. The data exclude war bonds and savings except for some life
insurance.
(See footnote 42.)
The figures shown give a comparison for various cities, in terms of June I9 U3 prices, based upon the standard
"maintenance” level established by the Works Progress Administration (see footnote 29) and modified in 1938 to
bring the food up to the level of the "adequate diet at minimum cost" 6f the United States Bureau of Home Economics*
"The budget measures the cost of approximately the same level of living /for different cities7 and avoids differ­
ences caused by variations in income, habits, and oustoms." It "is not an official budget of the Department of
Labor, nor does it represent a recommended standard of living." (Monthly Labor Review. U. S. Bureau of Labor
Statistics, October 1943, pp. 803-804)
The Bureau of Labor Statistics' latest mimeographed release, Relative Differences in the Cost of Equivalent floods.
Rents, and Services in 33 Large Cities. March 1945. dated June 1, 1946, gives the intercity indexes in terms of
Washington, D. C. as a base* To convert these indexes to dollar amounts, the figure of $1,809 given in the pre­
ceding estimate (in the present table) for Washington, D. C. in June 1943 was converted to the March 1945 level
by applying the percentage change in the BLS index for Washington from May 1943 to March 1945* (The percentage
change May-June 1943 was insignificant.) The resulting figure of $1,844 was then used as a base and the other
city indexes were applied to it, giving the amounts shown. The data indicate that the percentage difference
between the highest and lowest cost cities is 1 7 percent, but the variation from the average index of 94*6 does
not exceed 9 percent* It should be noted that the costs are only rough approximations inasmuch as the BLS inter­
city relationships for 1943 are not on the same basis as for 1945, since the earlier ones represent the WPA main­
tenance level and the later ones give the relationships at the average income level •— a point much closer to the
health and decency than to the maintenance standard.
Textile Workers Union of America, Substandard Conditions of Living» A Study of the Cost of the Emergency Suste"«nca
in Five Textile Manufacturing Communities in January-February 1944. New York. 1944. u p . 58-59. The content of the
TWUA. repriced subsistence budget differs from the WPA budget (estimated at $ 903 for a 4-person family in 1935)
chiefly in an allowance of $ 1 6 2 for war bonds and the inclusion of $109 for food-buying habits to take into account
the fact that shoppers cannot always buy most efficiently, especially during the period of war.
Includes savings represented by $162 in war bonds and $21 in life Insurance premiums.

Footnotes concluded on page

62 .

- 62 .
Tattle 2 -

272

Recent available estimates of individual and family budgets and expenditures at various levels of living
(footnotes concluded)
36/

II/

$1
s©l
iP|
Si 3|
SSS®

University of California, The Heller Committee for Research in Social Economics, Quantity and Cost Budgets for
Dependent Families or Children. Prices for San Francisco. September 19H6. This study characterises the budget
standard in the following terms (pp. 3t *0 1 "In preparing this budget, the Heller Committee has attempted to
maintain a standard which will preserve the health and efficiency of a dependent family and enable its children
to grow up among their neighbors without being stigmatized* At the same time7, the budget attempts to stay within
the limits of the support that a welfare agency may reasonably be expected to provide* It is not in any sense
a measurement of the minimum required to sustain life nor of the minimum on which families can subsist for brief
periods of emergency when expenditures are limited to the bare essentials of food and shelter* The items and
quantity allowances take into account not only physiological requirements but also certain customary living
habits — such as dietary preferences, tobacco, visits to the barber, an occasional movie — which practical
relief administrators recognize will be indulged at the expense of physiological requirements if no provision
is made for them in a relief family1s budget. In other words, it represents a standard at which the average
housewife may be expected to manage her household and bring Tip her children to be good citizens if her Income
is derived from public relief." "Because the budget is designed for social dependents, no provision is made
for insurance or savings, or for medical care, which must be furnished free by clinics»" The Heller depend­
ency standard thus may not be in all respects comparable to the WPA maintenance level but is much closer to it
than to a "health and decency" standard, and hence is included under the more restricted category*
The figures shown here exclude income taxes as well as savings, and include Social Security (old-age and
unemployment insurance) taxes of 2 percent calculated on a total budget that includes these taxes, in cases where
an individual is employed*
In the absence of more suitable data, the instructions of the Heller Committee for computing a dependency budget
for a child in a foster home have been followed in the dependency budgets for children used here* These instruc­
tions are to take his per capita share of the allowance for rent fOr a family of appropriate size, general house­
hold expenses, and other overhead expenses allowed as a flat sum to all families, regardless of size, and add his
additional allowance for other expenses determined with reference to age and sex. (This additional allowance,
however, excludes medical and dental expenses as this care is supposed to be given by free clinics.
(See foot­
note 36.)) The resulting budgets for dependent children, therefore, consist partly of overhead items averaged
over all members of the household, and partly of additional Expenses attributable to the addition of a child
to the household* It should, however, be pointed out that inasmuch as the level of dependent exemptions in­
volves considerations of cost for the marginal, i*e*, added dependent, a sounder theoretical method would be to
determine how much additional allowance for expenses is necessary with respect to an additional child for each
size of family, rather than the average allowance on a per person basis without reference to family size, used
for some of the items*
Allowances are for an employed individual 18-20 years old living as a member of a U-person family. The first
figure is the amjount allowed for a boy; the second, for a girl* See also footnote 36*
Allowances are for a nonworking family member in a family of U, the smaller amount being for a child of 1 - 2
years and the larger amount for a boy 15 - 17» See also footnote 36*
Rent is taken as that for a 3-person family ($25*25) since data are not available for a couple.
Rough estimate made by adding to the budget of $l,l6l an allowance of $80 consisting of items for medical care,
life insurance, and the increase in Social Security taxes on the higher budget.amount* The medical and insurance
items are taken as one-half the WPA allowances for a b-person family in March 1935 brought up to date by price
indexes. See footnote U 2.
Rough estimate made by adding approximately $163 to the budget of $1,732 to cover allowances for medical care,
life insurance and the increase in Social Security taxes based on the Increased budget. The medical and insur­
ance items are obtained by using the BLS consumers' price index (miscellaneous group) for San Francisco to bring
the WPA March 1935 allowances of $ 6U for medical care and $U6 for insurance up to September 19^-6 price levels*
Adjustment made by applying to each budget figure in estimate 5a above, the percentage change in the consumers'
price index for San Francisco from September I9H6 to September 19^ 7.
The "break-even point," as defined by the Bureau of Labor Statistics, is that amount of total family income,
after subtraction of Income, poll, and personal property taxes, just sufficient to cover average expenditures
for current consumption and gifts and contributions, leaving no net savings or deficit* The amounts needed
were computed by linear interpolation in the family-size tables of the BLS printed release entitled Expenditures
and Savings of City Families in 19^U. Serial Ho. R. 1818. The break-even data shown here exhibit increasing
irregularity with respect to larger families since these families are of less frequent occurrence and th