the higher the processing tax which can be levied. Farm leaders who have devoted study to the problem contend that there can be no assurance of continuity for any program which fails to provide a continuing source of revenue.

Thus if income taxes were increased, it might be urged that the additional revenue, instead of being used to make agricultural adjustment possible, should be used for such general social purposes as social insurance, scientific research, unemployment insurance, and the educational activities of the Federal Government.

A general sales tax that would provide the $500,000,000 a year which is approximately the sum now derived from processing taxes. would have to be at the rate of about 14 percent on the wholesale value of all manufactured commodities. A serious disadvantage in raising large funds through a general sales tax would be the pressure that would surely be brought to bear by representatives of dif ferent commodities to avoid the sales tax. The danger inherent in a program relying upon annual appropriations, which would be subject to discontinuance in any year, was foreseen by sponsors of the McNary-Haugen bill. They proposed the equalization fee, to be paid by farmers, as the continuing source of revenue for the McNaryHaugen plan. For the adjustment program, the problem was met by the provision for processing taxes.

II. The Processing Tax and How It Operates

Benefit payments to farmers cooperating in A. A. A. programs ordinarily do not come from annual appropriations of Congress. The payments are not adding to the public debt. They are balanced by processing taxes collected by the United States Bureau of Internal Revenue from the first domestic processors of farm products, that is, from millers, cotton textile manufacturers, packers, and other first processors.

Processing taxes are not assessed against farm products that are exported, and therefore do not, in themselves, have any effect on export trade.

What Decides the Rate?

The maximum rate of the processing tax is ordinarily the difference between the average farm price and the fair exchange value of the commodity, or "parity. "

Parity is not a set price. It is that price for the commodity which will make it exchange for the same amount of goods farmers buy as it would exchange for before the war, 1909-14. For instance, in 1932 it took nearly 2 bushels of wheat to buy as much industrial goods as one bushel would buy before the war. By adding 30 cents

per bushel to the 1932 market price of wheat the old buying power of wheat could be restored. That is why the processing tax on wheat was set at 30 cents per bushel, and most of this money was paid to cooperating farmers in the form of benefit payments.

The rate of the tax is fixed by the Secretary of Agriculture in accordance with rules laid down by Congress in the Agricultural Adjustment Act and amendments thereto.

If the full rate of the tax is found likely to cause consumption to be cut down and surpluses to pile up and injure market price the Secretary of Agriculture may lower the rate. This has been done in the case of corn.

Processing taxes tend to raise the wholesale or retail prices of the products on which they are levied. This may put these products at a disadvantage in competing with substitutes, and thus hurt the farmer. To keep competition in balance, compensating taxes may be levied on these substitute products. This has been done on jute and paper in the forms in which they come into competition with

cotton.

In the same way compensating taxes, in addition to the tariff, may be levied on imported articles (like cotton goods) to keep the usual balance of competition between imported goods and those made in the United States.

Some States Pay More Processing Taxes Than Others

Naturally, collections of processing taxes are greater in some regions than in others. For instance, about one-fifth of all the processing taxes on wheat are collected in Minnesota. This does not mean that the people of Minnesota are being taxed more heavily than those who live in other States. The tax is distributed all over the United States in the form of slightly higher prices for wheat products milled in Minnesota.

In the same way nearly half the corn-hog processing taxes are collected in Illinois because Chicago is a great meat-packing center. Because North Carolina is a tobacco and cotton textile manufacturing region more than 19 millions out of 128 millions of dollars paid in cotton processing taxes were collected there, and nearly 4 million. dollars out of 14 millions collected in tobacco processing taxes were gathered in that State.

Farmers do not have to pay processing taxes on products raised by themselves and used at home.

III. How Processing Taxes Have Helped Farmers

Not all the increases in farm prices since 1932 have been due to the processing-tax adjustment programs. The cheapened dollar and

the drought were partly responsible. Much of the large increase in total farm income, however, is due to the adjustment programs and benefit payments. The total American farm income in 1932 was about 42 billion dollars; in 1933 it was a little over 5 billions; in 1934, in spite of the drought, it was about 6 billions.

The cotton income of 1932 was $483,912,000. In 1934 it was $871.420,000. Of this increase, benefit payments contributed $115,400,000. The wheat income in 1932 was 195 million dollars. In 1934 it was 382 million dollars. Of this $101,600,000 was in benefit payments. In 1932 farmers sold about 122 billion pounds of pork for 439 million dollars. In 1934 farmers sold about 112 billion pounds of pork for 497 million dollars. They received in addition 159 million dollars in benefit payments.

In the case of tobacco, prices to consumers have in general not been increased, although prices to producers have risen, and the increased return to the producers has apparently come from a slightly narrower margin to the processor and distributor.

Sugar prices to consumers have not risen, while returns to growers have been increased by benefit payments, because a reduction in the sugar tariff, equal to the amount of the processing tax, has accompanied the imposition of that tax.

A relatively small percentage rise in the consumer's price usually is accompanied by a much greater percentage rise in the farmer's price. This is because the farmer's share in the retail price is usually very low and because costs of distribution usually remain about the same no matter what the price is. For example, in March 1933 the consumer paid an average of 3 cents a pound for flour of which the farmer got only eight-tenths of a cent. In March 1934 the consumer paid an average of 4 cents a pound, of which the farmer got 2 cents. While the consumer paid 60 percent more, the farmer's share was nearly tripled.

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The only losses to middlemen from adjustment programs seem to be in temporary reduction of total business handled. In many cases middlemen have widened their margins to take care of the processing tax and other increased costs.

How the Tax Worked With Cotton

The 1933-34 processing tax on cotton came to about 115 million dollars. The value of that year's cotton crop, because of the adjustment program and other factors, increased by about 387 million dollars.

The annual consumption of cotton in the United States is, on the whole, relatively stable, and such variations as do take place are due more to general business conditions than to the price of the cot

ton. It is estimated that American consumption of cotton is not affected by more than 300,000 to 400,000 bales as a result of the processing tax. The tax does not, of course, apply to cotton exported, and therefore does not increase the price of American cotton in foreign markets. Adjustment of the American crop helps to strengthen world cotton prices.

The 12-cent cotton loan may have had some influence on foreign and domestic markets, but this has nothing to do with the processing tax and adjustment program proper. The cotton processing tax is 4 cents per pound. A rough rule for figuring how much that adds to the price of cotton goods is to multiply the number of pounds in a piece of cotton goods by 51⁄2 cents. It is estimated that the cotton processing tax has cost the American people an average of 93 cents per person per year, or less than 8 cents per month.

The higher income of cotton farmers has boosted American business activity, and has helped wage earners.

How the Tax Worked With Wheat

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The consumption of wheat in America is fairly steady regardless of price. Consumption per person was 5 bushels in 1919-20; 4 bushels in 1924-25; 4 bushels in 1929-30; 5 bushels in 1932-33, and probably about the same for 1933-34.

The processing tax on wheat has not been borne by the millers but has been passed on to the consumer. The tax has not put wheat prices out of line with prices of other products and has decreased consumption little if at all. Since it does not apply to exported products, it has not hurt American wheat exports.

How the Tax Worked With Hogs

The amounts of wheat and cotton used in America are relatively stable, regardless of price. That is why consumers tend to pay a larger sum total for wheat and cotton products in years when the prices of wheat and cotton are higher. That is not the case with pork.

Consumers as a group spend about the same gross amount for pork, when their yearly incomes remain unchanged, regardless of price. If prices are low they eat more, if prices are high they eat less. This means that the chief gains to the hog farmer from an adjust ment program are (1) saving himself the cost of producing more than people will eat at a fair price, and (2) saving himself the extra marketing cost of an excessive crop.

It has been asserted that farmers pay the hog processing tax. It has also been argued that consumers pay the tax, and the packers

have claimed that they pay it. All three stories have been told at the same time.

Certainly not all of the tax is paid by each of the three groups, at the same time.

When supplies of hogs are large there is what is known as a "buyer's market," and the processing tax appears to be paid largely by the farmer-seller. This condition held from November 1933, when the tax started, until late January 1934. During this period farmers shipped many hogs which the consumers would not have bought if the price had been high. The tax in that period appeared to be thrown back upon the farmer. The Government pig-buying program of the summer of 1933, in which about 6 million pigs and light hogs were taken off the market, had not been felt by that time because those hogs would not have reached the market yet.

Beginning in January 1934 the elimination of the hogs in the summer buying program began to be felt. The market gradually changed from a "buyers' market" to a "sellers' market." Hog prices to farmers rose from $3.06 January 15 to $3.86 March 15. During this period the processing tax appeared to be paid by

consumers.

By the end of March 1934 shipments of hogs increased because of better prices, and again there was a "buyers' market." Hog prices to farmers declined. Then came the drought and more forced selling, and the condition continued. In the summer and fall of 1934 this condition changed again and since then there has been a "sellers' market" most of the time, with the tax apparently paid by

consumers.

The tax began at 50 cents and was gradually increased until it was $2.25 per hundred pounds.

Whether farmers or consumers are paying the processing tax on hogs depends upon the sense in which the word is used. Farmers rather than consumers may be said to pay the tax in that its imposition, in the absence of any adjustment of supply, does not cause consumers to pay more per pound for pork. Since this is true, the tax may be said to reduce the price per pound of hogs received by farmers. But in another sense consumers rather than farmers pay the hog processing tax. It is by means of the tax that the adjustment of supply is brought about, and the price per pound is increased. If the hog processing tax were for any reason suddenly removed, and supply and demand conditions for hogs remained unchanged, the market price of hogs might, temporarily at least, go up by at least a portion of the amount of the tax. But farmers no longer would receive benefit payments and as soon as uncontrolled production permitted the supply of hogs to be increased, the price would go down.