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Investigation of concentration of economic power; monograph no. 1[-43] (Volume no. 3) online

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^^3d Sessfon*^} SBNATE COMMITTEE PRINT



INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER



TEMPORARY NATIONAL ECONOMIC
COMMITTEE

A STUDY MADE UNDER THE AUSPICES OF THE DEPART-
MENT OF COMMERCE FOR THE TEMPORARY NATIONAL
ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS,
THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION
NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING
AND DIRECTING A SELECT COMMITTEE TO MAKE A
FULL AND COMPLETE STUDY AND INVESTIGATION
WITH RESPECT TO THE CONCENTRATION OF ECONOMIC
POWER IN, AND FINANCIAL CONTROL OVER,
PRODUCTION AND DISTRIBUTION
OF GOODS AND SERVICES



MONOGRAPH No. 3
WHO PAYS THE TAXES?

(Allocation of Federal, State, and Local
Taxes to Consumer Income Brackets)



Printed for the use of the
Temporary National Economic Committee




UNITED STATES

GOVERNMENT PRINTING OFFICE

WASHINGTON : 1940



TEMPORARY NATIONAL ECONOMIC COMMITTEE

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman

HATTON W. SUMMERS, Representative from Texas, Vice Chairman

WILLIAM H. KING, Senator from Utah

WALLACE H. WHITE, Jr., Senator from Maine

CLYDE WILLIAMS, Representative from Missouri

B. CARROLL REECE, Representative from Tennessee

THURMAN W. ARNOLD, Assistant Attorney General

•WENDELL BERQE, Special Assistant to the Attorney General

Representing the Department of Justice

JEROME N. FRANK, Chairman

•SUMNER T. PIKE, Commissioner

Representing the Securities and Exchange Commission

GARLAND S. FERGUSON, Commissioner

•EWIN L. DAVIS, Chairman

Representing the Federal Trade Commission

ISADOR LUBIN, Commissioner of Labor Statistics

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics

kepresenting the Department of Labor

JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel

•CHARLES L. KADES, Special Assistant to the General Couiisel

Representing the Department of the Treasury



Representing the tx irtment of Commerce
LEON HENDERSON, Economic Coordinator
DEWEY ANDERSON, Executive Secretary
THEODORE J. KREPS, Economic Adviser



Monograph No. 3
WHO PAYS THE TAXES?

GERHARD COLM AND HELEN TARASOV



•Alternates.

n



ACKNOWLEDGMENT

This monograph was written under the general supervision of

GERHARD COLM

Professor of Economics

New School for Social Research

Fiscal Expert, Department of Commerce

BY

HELEN TARASOV

of the Industrial Economics Division

Department of Commerce

The Temporary National Economic Committee is greatly indebted
to these authors for this contribution to the literature of the subject
under review.

The status of the materials in this volume is precisely the same as that
of other carefully prepared testimony when given by individual witnesses;
it is information submitted for Committee deliberation. N^o matter wfiat
the official capacity of the witness or author may be, the publication of his
testimony, report, or monograph by the Committee in no way signifies nor
implies assent to, or approval of, any of the facts, opinions, or recom-
mendations, nor acceptance thereof in whole or in part by the members of
the Temporary National Economic Committee, individually or collec-
tively. Sole and undivided responsibility for every statement in such
testimony, reports, or monographs rests entirely upon the respective
authors.

Joseph C. O'Mahoney,
Chairman, Temporary National Economic Committee.

in



TABLE OF CONTENTS



Page

Letter of submittal . vii

Part I. — Scope and main results of the study . 1

A. Scope and limits 1

1. Theoretical aspects . 1

2. Technical aspects 2

B. Sources and methods ^ 3

1. Measurement of income 3

2. Classification of taxes 3

C. R6sum6 of results 6

Part II. — Procedures 9

A. Consumer income and consumption patterns in 1938-39 9

1. Incomes 9

2. Savings - 10

B. Value added by manufacture 11

C. Taxes : - 12

1 . Tax classification 12

(a) Personal nonshiftable taxes 12

(b) Taxes on specific consumption 13

(c) Business taxes 15

(1) Corporate income taxes 16

(2) Other business taxes 16

2. Tax allocation 16

(a) Personal taxes 17

(6) Specific consumption taxes 18

(c) Business taxes allocated to sectors of the economy. 20

'3. Tax shifting 23

(a) Corporate income and profits taxes 23

(b) Taxes shifted to consumption 24

(c) Taxes shifted to wages 25

Part III. Results 27

A. Final tax patterns 27

1. Personal and consumer taxes 27

2. Taxes and income 27

3. Taxes as an influence on consumption 30

B. Influence of taxes on business 32

C. Influence of taxes on savings 32

Appendices:

I. The defense-tax bill 34

II. Selective bibliography 36

III. Tax capitalization 38

IV. Distribution of taxes on real estate by tvpe of owners 39

V. The method of study. 42

Index 53

LIST OF TABLES

I. Savings and all taxes as percent of consumer income, 1938-39 .. 6

la. Personal and specific consumption taxes, as percent of consumer in-
come, 1938-39 12

lb. All taxes as percent of consumer income, 1938-39 13

II. The distribution of customs duties by type of import 14

III. Specific consumption taxes 1938-39 19

IV. Taxes paid by sectors of indu.stry 22

V. Business taxes as percent of income produced, 1938-39 22

VI. Estimates of State sales taxes paid by commodity groups ._ 25

VII. Total taxes as percent of consumer income, if business taxes were

shifted to wages, 1938-39 26



VI TABLE OF ^CONTENTS

Page
VIII. Taxes as percentage of national income in United States and Great

Britain 27

IX. Income and tax percentages for 1938-39, cumulated 1.. 28

X. Taxes and income, 1932 28

XI. Taxes in relation to consumer income in 1938-39, if 1932 tax rates

had been in force in 1938-39 29

XII. Taxes and savings as percent of consumer income per consumer unit,

1938r39 J 30

XIII. Consumer savings by income brackets, related to consumer incomes

in 1935-36 and 1938-39. - - 33

APPENDIX TABLES

A. Percentage of defense taxes paid by each income bracket 34

B. Defense taxes as percent of consumer income 35

C. Basic data on consumer incomes , 42

D. Gifts, savings, and expenditures 43

E. Tax receipts, fiscal year 1939 44

F. Personal taxes by income brackets 45

G. Specific consumption taxes and all consumption taxes, by income

brackets - 47

H. Taxes on business shifted to consumers and shareholders 50

J. All personal taxes, including taxes shifted to .shareholders 51

DIAGRAMS

I. Personal and specific consumption taxes as percentages of consumer

income, 1938-39 _ 4

II. Original personal and specific consuirption taxes phis business taxes

shifted forward, as percentages of consumer income, 1938-39 5

III. Distribution and disposition of consumer income — United States,

1938-39- _ - 7

A. Consumer units and income by income brackets 7

B. Consumer taxes and consumer savings 7



LETTER OF SUBMITTAL



The Honorable Joseph C. O'Mahoney,

Chairman, Temporary National Economic Committee,

United States Senate, Washington, D. C.
My Dear Senator: I have the honor to submit herewith a report
on Who Pays the Taxes? (Allocation of Federal, State, and Local
Taxes to Consumer Income Brackets). It is an exploratory study,
the results of which must be regarded as tentative. I believe, how-
ever, that even these tentative results shed light on certain economic
aspects of the existing tax system and may be useful in formulating
a tax policy which takes into account the economic repercussions of
taxation.

The report has been prepared by Miss Helen Tarasov in consulta-
tion with Gerhard Colm. The authors had the benefit of consultation
with various members of the Industrial Economics Division of the
Office of the Secretary, and of Marius Farioletti.
Respectfully submitted.

Ernest A. Tupper,
Assistant Economic Adviser, Department of Commerce.

VTI



WHO PAYS THE TAXES?

ALLOCATION OF FEDERAL, STATE, AND LOCAL TAXES TO CONSUMER

INCOME BRACKETS

Part I.— SCOPE AND MAIN RESULTS OF THE STUDY

A. SCOPE AND LIMITS

1. Theoretical aspects. — The distribution of the tax burden among
people of various income brackets is an essential criterion not only of
the justice of the tax system but also of its economic effects. The
extent to which taxes curtail the purchasing power of the masses or
absorb mcomes of the higher brackets or fall upon consumption or on
savings cannot be known without studying the incidence of taxes on
people in the various income brackets. No rational tax pohcy can be
developed without knowledge of these basic facts.

It is not surprising, therefore, that many attempts have been made
to measure the impact of the tax system upon people of various income
brackets. Usually these measurements have been based upon an
analysis of the taxes paid directly plus. those indirectly included in
the various expenses paid by famihes of a typical size, of a typical
economic status, and residing in a specific locality.^

In this report an attempt has been made to give a break-down of all
Federal, State, and local tax revenues, according to the income brackets
of the tax bearers. Thereby the results of the sample studies are
supplemented by an over-all picture.

Before presenting the results it is necessary to emphasize that an
analysis of the progressive and regressive elements in the tax system
is essential for judging its equity and its economic effects, but they are
by no means the sole elements that must be considered. Other factors
to be considered can only be mentioned here:

(a) For judging taxes, the use made of their yield should not be
ignored.

In this analysis, for instance. Social Security taxes are included
without regard to the distribution of benefit payments. Business
taxes, too, are treated without considering Government services
rendered to business. For a comprehensive analysis of the effects
of the fiscal system on the distribution of real income, the benefits
derived from free services of the Government (education, pubUc
hygiene, etc.) should not be neglected.

(b) The type of tax should be considered. Among the levies which
form the main part of the tax burden of the lower income groups are
(besides Social Security taxes) poU taxes, excise taxes, and the part
of property taxes which affects the costs of housing. A poll or head

1 See, for instance, the very careful analysis of this sort published by the Twentieth Century Fund—
Studies in CuTrerU Tax Problems, 1939. Research Director Carl Shoup, Associate Directors Roy Blough and
Mabel Newcomer. For Great Britain, see Report of the Committee on National Debt and Taxation, 1927
(so-called Colwyn Report).



2 CONCENTRATION OF ECONOMIC POWER

tax; a tax on a life necessity, such as housing; a tax on mass luxuries,
such as tobacco ; or on what may be necessity and luxury at the same
time, as gasoline, may fall upon people of the same income bracket and
yet be quite different from the point of view of justice or social hygiene.

(c) The indirect costs of various taxes, resulting from the cost of
administrative expenses and economic frictions, should be considered.

Various taxes imply not only different costs of collection but also
varying costs of payment for the taxpayer and result in diverse
degrees of tax resistance, a factor not to be overlooked in judging a
tax system. The economic frictions also differ as between taxes.
This aspect, too, is outside the scope of this study but should not be
ignored in a comprehensive appraisal of a tax system and of reform
proposals.

Thus, although the aspect of progressiveness and regressiveness
presented in this study is fundamental — it is probably the most
essential single aspect for judging a tax system, nevertheless, it is not
the only criterion which should be applied in deciding on tax policy.

2. Technical aspects. — A study of the progressive and regressive
elements in the tax system is further limited by difficulties inherent
in the problem itself. Such a study belongs to the type of analysis
which may be called constructional statistics. For this type of
analysis the same accuracy cannot be claimed as for the usual sta-
tistics based on factual counting. The National Resources Planning
Board's estimates are the best available source of information on the
distribution of consumer income, expenditures, and savings, even
though they are based on a relatively small sample. The figures on
tax revenue are taken from actual statistics, but the subdivision of the
tax revenue often does not correspond to the break-down needed for
this economic classification. In this respect, too, estimates had to
take the place of actual statistics. Nevertheless, the study does give
a picture of the comparative relation between the taxes and incomes
of the various brackets. The reasonableness of the results has been
tested by varying some of the basic figures within the range of prob-
ability. Even assuming possible errors in certain estimates (especially
with respect to the extrapolation of incomes, expenditures, and
savings) the results wouljd not change fundamentally. Yet it is
frankly admitted that this is an experimental approach that requires
further refinement. It is hoped that the 1940 Census of Population,
in conjunction with a more detailed analysis of the 1939 income-tax
returns, will permit more accurate statistics on the distribution of
incomes than the one used in the present report.

A second difficulty arises from the fact that even the most complete
statistical material can never measure the incidence of taxation. The
incidence of taxes can be derived from figures on tax payments only
on the grounds of theoretical reasoning and hypothetical conjecture.
Whatever statistical refinement is achieved, therefore, the results
necessarily rest on a number of assumptions. The incidence of
taxation depends, among other factors, on the. degree of competition
and monopoly prevailing in an economy, on the direction of Govern-
ment regulation of prices and cost factors, on the general trend of
economic growth or stagnation, on the development of labor produc-
tivity, on the time which has elapsed since the introduction of new
taxes or the increase (or decrease) in tax rates, and, finally, it depends
on the use made of taxes and on the other fiscal policies (e. g., borrow-
ing) pursued at the same time.



CONCENTRATION OF ECONOMIC POWER 3

With respect to the assumptions concerning incidence, a crude test
of reasonableness has also been applied. The same computation has
been made twice, once assuming that business-cost taxes are shifted
forward to prices, then assuming that they are shifted backward to
wages. With respect to the general patterns of progressiveness or
regressiveness of the tax system the results of the two computations
do not differ substantially.

B. SOURCES AND METHODS

1. Measurement of income. — The National Resources Planning
Board publications on Consumer Incomes and Consumer Expenditures
in 1935-36 were used as a basis for estimating the distribution of
personal incomes and the patterns of expenditure and saving in the
various income brackets. The Board's 15 income groups were con-
densed to 10 classes of gradually increasing intervals for convenience
in handling. Its concept of "consumer units," meaning both families
and individuals, was adopted. Likewise, the Board's saving and gift
figures were taken as a starting point, and its conclusions as to per-
centages of expenditures directed to various types of goods and
services by the different income brackets were used as the basis for
allocating a wide range of consumer taxes. The Bd9,rd's estimates
for 1935-36 were extrapolated to the year 1938-39 with the help of
the Department of Commerce estimates of national income. The
method applied for this extrapolation is discussed in part II, section
A. 1.

Business taxes were related to business activities measured by the
income produced by production and services. These estimates were
derived from the statistics of national income prepared by the De-
partment of Commerce.

These national income figures were conjoined to the Board's data
in Structure of the American Economy in order to extend the latter
figures to 1938-39. Extrapolation was naturally impossible in view
of the uneven proportion of income produced by industries at different
stages. The assumptions imposed by incomplete or defective data
and the step-by-step technique of calculation are summarized below
in part II B, and presented in greater detail in appendix V.

Before any allocation to consumer or produced income of the
various taxes could be made, however, it was necessary to supplement
the ordinary fiscal classification of reveni by an economic grouping.
Such economic classification is quite dinicult because one tax fre-
quently, if not usually, contains elements of diverse economic signifi-
cance. The property tax especially exemplifies the complex nature
of taxes.

2. Classification of taxes. — In classifying taxes according to their
incidence three tax groups may be suggested :

(a) Taxes on individuals (poll, income, estate and gift, non-business
personal property) attributed to individual income taxpaj^ers under
the presumption that they normally cannot be shifted.

(b) Excise taxes on specific products (like tobacco, liquor) which
can be attributed to the consumers of these specific products under
the assumption that they can be and usually are shifted forward by
the original payers. Property taxes on home-owners also fall into
this category. These first two groupings should each be subdivided
according to income classes, if variations in actual incidence and effect
are to be observed.



CONCENTRATION OF ECONOMIC POWER



Diagram I











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^


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■20


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CONSUMPTION

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PERCENTAGES
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1938-1939


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TAXES AS PERCENT

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/NCOME CLASSES, BY PiPCENT OF AGGREGATE INCOME


J. nPAum w oamaa
0D40-3IS



CONCENTRATION OF ECONOMIC POWER



Diagram II




20



30-



40



30-



•qso



/o



icaatoB mramsi fzdbui. umricnims
aiLB tiiPi mm no locil ucasni



imasu. UD STUB laiminu- ncou

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CONTBIBUnCSS; TEDSSiL UOt STATE ES-

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THTWTW PKBSOUL FtOPERrT TAXES[ AKD




ORIGINAL
PERSONAL

AND
SPECIFIC
20 C0NSUM!3TI0N
TAXES
PLUS
BUSINESS
30 TAXES

SHIFTED FORWARD!
AS
PERCENTAGES

OF
CONSUMER

INCOME
1938-1939



40



II IE EZ Y 21 SIMIXZ

INCOME CLASSES, BY PERCENT OF AGGREGATE INCOME



I


unlar


liOO


11


»500




1000


III


1000




1500


17


1500




2O0O


V


JOOO




3000


VI


3000




5000


VII


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VIII


10,000




15,000


n


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20,000


I


20,000


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u. BFurgoit or aamaet
DD40-324.



6



CONCENTRATION OF ECONOMIC POWER



(c) For taxes on business in general, no generalized assumption
with respect to incidence as a whole can be made. These levies,
such as pay-roll taxes and sales taxes, will be shifted to prices under
certain business conditions; under other conditions they will be shifted
backward to the factors of production (wage earners, producers of raw
materials) or they will be partly borne by profits. For this group of
taxes the ultimate tax bearer cannot be determined without a special
analysis of economic conditions. In the first stage these taxes are
therefore treated separately as business taxes and related to the various
branches of industrj^ where the taxes were collected. For the final allo-
cation of these taxes to individuals, the analysis must proceed under var-
ious assumptions which will be discussed later. For the computation
summarized in the following section, it has been assumed that —

(1) Corporate income, profits, and capital-stock taxes are eventu-
ally borne by stockholders, whose income would have been higher in
the absence of such levies. These taxes were therefore finally dis-
tributed on the basis of stockholdings by income brackets.

(2) All other business- taxes are finally shifted to consumption.
They were therefore allocated in proportion to the corresponding
expenditures.

C. RESUME OF RESULTS

The main results of the study can be summarized in the following
table:

Table I. — Savings and All Taxes ' as Percent of Consumer Income, 1938-39 ^



Income classes



I. Under $500

II. $.500 to $1.000...

III. $1,000 to $1.500..

IV. $1,500 to $2,000..
V. $2,000 to $3,000..

VI. $.3,000 to S-^OOO-.
VII. $5,000 to $10,000.

vin. $10,000 to $15,000

IX. $15,000 to $20,000
X. $20,000 and over.

Total



Total con-
sumer in-
come (in
millions
of dollars)



2,363

10, 038

12,280

10, 210

12, 194

7,743

4,861

2,238

1,601

6,333



69. 861



Taxes as percentage of income



Federal



7.9
6.6
6.4
6.6
6.4
7.0
8.4
14.9
19.8
27.2



9.2



State
and local



14.0
11.4
10.9
11.2
11. 1
10.6
9.5
10.6
11.9
10.6



11.0



Total



21.9
18.0
17.3
17.8
17.5
17.6
17.9
25.5
31.7
37.8



20.2



Savings as
percentage
of income



-24.3

-2.0

5.2

."5.8

9.6

16.8

28.4

32.3

32.3

38.3



11.4



1 Business taxes were assumed to be shifted to consumer income.
i See diagram III.

Sources: Income and savings derived by extrapolation of National Resources Planning Board figures in
Consumer Incomes in the United States and Consumer Expenditures in the United States, Washington,
1939. For original tax figures and their sources, see appendix table E.



Federal taxes (which include Social Security taxes) impose an
approximately flat-rate burden on incomes up to $10,000, with a very
slight regression for incomes below $500, measured as percent of
income, and with a slight progression above $3,000. Beginning at
$10,000, the progression increases substantially.



CONCENTRATION OF ECONOMIC POWER
Diagram III

DISTRIBUTION AND DISPOSITION OF
CONSUMER INCOME

UNITED STATES, 1938-1939



Income Brockets



I UNDER $500 - -
JI $50O-$l,0O0 -

in $i,ooo-$i,5oo-



A— CONSUMER UNITS AND INCOME
(BY INCOME BRACKETS)



Percent of Percent of .

Consumer Units Aggregate t "

Income Received
17.0 3.4



12 $1,500- $2,000

I $2,OOO-$3,0OO

21 $3,OO0-$5,0OO

mi $5,000 -$10,000

3nn $10,000 -$15,000-

IZ $15,000 -$20,000

X $20,000 AND OVER

t Income tncludes Deoih and Corporote



-29.5-
-22.1 -
-13.1 -

- I 1 .2 -

- 4.6-

- I .5-

- .4-
- .2
- .3



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17.6-

14.6 -

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15 20

PER CENT



I ond Pro'tis Toi9S.



B— CONSUMER TAXES AND CONSUMER SAVINGS *

Income Brackets



m IZ 3t zzisnsniizz




Average of
All Brackets






^




90


-




- 90


60


-





- 80


70


-




- 70


60


-




- 60


50


-




- 50


40


-




- 40


30


-




- 30


20


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- 20


10


.'.•.


- 10


n




.•••.


Jo



entoges of Consumer



elude Business Toios shifted forward.



g CONCENTRATION OF ECONOMIC POWER

State and local taxes, on the other hand, hover m the vicinity of
10 percent of the aggregate income of each income bracket except the
lowest, where they amount to 14 percent of income.

Even if this study presents merely reasonable estimates, it does
indicate with a high degree of probability the contemporary tax
pattern. It may be regarded as a scouting expedition into unmapped
territory in order to delimit known and unknown regions and thereby


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