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NARRATIVE SYNOPSIS SUPPORTING REVENUE ESTIMATES

The estimates of the revenues of the Federal Govern- | receipts of the fiscal years 1942 and 1943. Hence the ment are prepared in the Treasury Department in December of each year for the current fiscal year and for the fiscal year next ensuing.

Inasmuch as the tax revenue from practically every major source is directly dependent, although in varying degree, upon business conditions during the period in respect of which the taxes are levied, it is necessary to forecast the general business situation for a period ending approximately 18 months later. This forecast is based upon the analysis of a wide variety of financial and other economic data and includes a forecast of the direction and the magnitude of the movements of industrial production, profits, security and commodity prices, employment, pay rolls, and other components of business activity. In view of the well-recognized uncertainty involved in forecasting the various phases of business activity, accentuated this year by the dislocations of industry and profits caused by the shifting from a peacetime to a wartime economy with its attendant allocations, price, and other control measures, such forecasts, and the concomitant estimates of future revenues, may be revised from time to time to take account of changed conditions.

Upon these business forecasts depend the estimates of the aggregate amounts of corporation and individual incomes as well as the distribution of such incomes among various income classes, and the volume of consumption of commodities upon which taxes are levied. Consideration must be given to the fact that changes in the various indicators of business activity are not reflected immediately or in direct proportion in the various sources of revenue. Thus, in periods of rising business activity profits and taxable incomes usually rise more than proportionately to the increase in the volume of business because of the relative inflexibility of certain costs. In addition, consideration is given to the fact that the increase in the amount of income-tax collections which will result from a given increase in individual incomes is accentuated under a progressive-rate schedule because not only is the individual taxpayer's income greater but also the taxpayer pays a larger percentage of the higher

income as income tax.

Changes in business conditions, in the amounts of income, and in the volume of consumption and importation of commodities are reflected more immediately in the receipts from some taxes than from others because of the variation in the method of collection of the taxes. For example, stamp taxes are collected prior to the ultimate sale of taxed articles while many of the miscellaneous internal-revenue taxes are collected each month on the tax liabilities of the previous month. However, collections from taxes such as the estate and gift taxes and the tax under the Federal Unemployment Tax Act, formerly title IX of the Social Security Act, are made upon liabilities of a much earlier period and therefore do not respond as promptly to changes in general business conditions.

The lag between the time income is received by taxpayers and the time of receipt of income taxes based upon such incomes is particularly important in its effect upon total tax receipts in any given year. Thus, in general, the changes in incomes in the calendar year 1941 will not be reflected in income-tax receipts until the income-tax returns are filed on or before March 15, 1942. Because of the privilege of making quarterly installment payments of these tax liabilities, the collections will be received throughout the calendar year 1942, thus falling into the

estimated current income-tax receipts, both corporation and individual, for the fiscal year 1942 are made up partly from payments on calendar year 1940 incomes and partly from payments on calendar year 1941-incomes. Similarly, fiscal year 1943 estimates of income-tax receipts include payments based upon the incomes of each of the calendar years 1941 and 1942.

In presenting the revenue estimates in the foregoing statement an adjustment has been made in total receipts to reflect the changes brought about by the 1939 amendments to the Social Security Act. There has been created on the books of the Treasury the "Federal old-age and survivors insurance trust fund," to which was transferred on January 1, 1940, the amount standing to the credit of the old-age reserve account. For the fiscal year 1941 and each subsequent fiscal year there is appropriated to the fund an amount equivalent to 100 percent of the taxes received under the Federal Insurance Contributions Act, with the proviso that the estimated administrative expenses of the Treasury and the Social Security Board with respect to the collection of taxes and the payments from the fund shall be repaid to the Treasury. In order to show the amount of revenue applicable to the general expenditures of the Government there has been deducted from total receipts a sum equivalent to the net appropriation to the Federal old-age and survivors insurance trust fund. The detailed analysis set forth below is based on total revenues and receipts and not on the net amount after adjustment.

TOTAL REVENUES AND RECEIPTS

Total revenues and receipts, general and special accounts, are estimated (on the daily Treasury statement basis, unrevised) in the amounts of $12,816 millions for the fiscal year 1942 and $17,852 millions for the fiscal year 1943. The estimated amount of total receipts in the fiscal year 1942 represents an increase of $4,548 millions over total receipts of $8,269 millions in the fiscal year 1941, while the estimated amount of total receipts in the fiscal year 1943 represents an increase of $5,036 millions over the estimated total receipts for the fiscal year 1942.

The following table shows the percentage distribution of the classified sources of revenue, of the actual receipts for the fiscal years 1940 and 1941, and of the estimated receipts for the fiscal years 1942 and 1943:

Percentage distribution of total revenues and receipts

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actual receipts in the fiscal year 1941 are shown in Statement No. 1, page A3. All year-to-year differences and percentages appearing in the text are based on the figures in this detailed table.

FISCAL YEAR 1942

Total receipts in general and special accounts in the fiscal year 1942 are estimated at $12,816 millions, an increase of $4,548 millions over actual total receipts of $8,269 millions in the fiscal year 1941. Net receipts total receipts less the net appropriation for the Federal oldage and survivors insurance trust fund-are estimated at $11,944 millions. This is an increase of $4,337 millions or 57.0 percent over actual net receipts of the previous fiscal

year.

Great expansion of incomes and business activity and extensive tax legislation which resulted in the introduction of new taxes as well as substantial increases in tax rates

were responsible for the large increase in receipts of the fiscal year 1942 over the fiscal year 1941. Collections in the fiscal year 1942 are affected by the two revenue acts of 1940 and the Revenue Act of 1941 as well as by other less important revenue legislation. Because of the statutory lag in collection of taxes, receipts in the fiscal year 1942 do not represent the full effect of legislation in the calendar years 1940 and 1941. This is particularly true of current income taxes.

Total receipts by sources of revenue [In millions of dollars]

General and special accounts

The sources of the revenues estimated for the fiscal

year

1942 as compared with actual receipts for the fiscal year excess-profits tax in computing normal tax and surtax net 1941 may be broadly summarized as follows:

Income taxes.

Miscellaneous internal revenue taxes.
Employment taxes..

Railroad Unemployment Insurance Act..
Customs.

Miscellaneous revenues and receipts.

Total.

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the purpose of simplifying the explanation of results, the calendar year common to both may be eliminated in comparing receipts of two fiscal years. Thus, in comparing fiscal years 1942 and 1941, the calendar year 1940 may be disregarded and the increase in receipts of the fiscal year 1942 over those of the fiscal year 1941 attributed almost entirely to the increase in estimated income levels Revenue Act of 1941 as compared with incomes and tax in the calendar year 1941 and higher tax rates under the rates existing in the calendar year 1939. However, only part of the full calendar year 1941 increase in liabilities, roughly 50 percent, is reflected in the fiscal year 1942 receipts.

Income taxes.--Total income taxes in the fiscal year 1942 are estimated at $7,147 millions. If this amount is realized, the fiscal year 1942 receipts will exceed by a considerable margin the collections of any previous fiscal year, being $3,202 millions or 81.2 percent greater than receipts of the previous record year, the fiscal year 1920. No detailed break-down of income-tax receipts is available for all fiscal years. However, such data as are available indicate that record-breaking levels should be reached in receipts for the fiscal year 1942 for both the current corporation and individual income taxes.

Total income tax receipts estimated for the fiscal year 1942 exceed actual collections of the previous year, which amounted to $3,470 millions, by $3,677 millions or 106.0 percent. This is attributable to an increase in income levels, a broadening of the income-tax base by legislation, and to upward revision in tax rates.

Current corporation income-tax collections, normal tax and surtax, are estimated to amount to $2,509 millions in the fiscal year 1942, and represent an increase of $860 millions or 52.2 percent over actual fiscal year 1941 receipts of $1,649 millions. Receipts in the fiscal year 1942 represent liabilities of the calendar years 1940 and 1941, whereas the fiscal year 1941 receipts reflect liabilities of the calendar years 1939 and 1940. While collections of calendar-year liabilities are not divided evenly between the two fiscal years affected, the proportions are such that for

In the calendar year 1939, corporations with net incomes of over $25,000 were taxed at rates which varied dends paid. In 1941, the normal tax rate is 24 percent between 16% percent and 19 percent depending on diviimposed at 6 percent for the first $25,000 of net income for this group. In addition, a corporation surtax is and 7 percent on the excess. For corporations with net incomes of $25,000 or less, the graduated rates of 12%1⁄2 percent, 14 percent, and 16 percent existing in 1939 were increased to 15 percent, 17 percent, and 19 percent in the calendar year 1941 and the corporation surtax added. The potential effect of the substantially higher tax rates and income base in 1941 as compared with 1939 is offset to some extent by the 2-year operating loss carry-over allowed in 1941-none in 1939-and the deduction of the

income in 1941.

Corporation excess-profits tax receipts are estimated to amount to $1,234 millions in the fiscal year 1942 and represent an increase of $1,070 millions or 651.0 percent over receipts in the fiscal year 1941 of $164 millions. As excess-profits tax receipts are collected in the same manner as current corporation income taxes, a comparison of calendar years 1939 and 1941 explains in the main the increase in the fiscal year 1942 receipts over the fiscal year 1941. No excess-profits tax as the term is now used applied in 1939. The excess-profits tax effective in the calendar year 1941 was instituted by the Second Revenue Act of 1940 and was revised by the excess-profits tax amendments of 1941 and by the Revenue Act of 1941. At present corporations are subject to excess-profits tax rates varying from 35 percent on adjusted excess-profits net income of $20,000 or less to 60 percent on adjusted excess-profits net income in excess of $500,000. Adjusted excess-profits net income is determined by the difference between earnings in the taxable year and the excess-profits credit computed under either the average earnings or the invested capital methods. Under the former, corporations are allowed a credit of 95 percent of the average net income of the base period 1936-1939, inclusive. Under the invested capital method, the credit is 8 percent on invested capital not in excess of $5 millions and 7 percent on the excess over $5 millions. Under either method a specific exemption of $5,000 and a 2-year carry-over of unused excessprofits credit of previous years are allowed. Under the 1941 Revenue Act, the excess-profits tax is computed first and allowed as a deduction for normal tax and surtax. Except for the excess-profits liability itself, the net income bases of the excess-profits tax and the normal tax are essentially the same although significant differences are possible under certain circumstances.

The declared value excess-profits tax has been in effect since 1933, but prior to 1940 was known as the excessprofits tax. Receipts from this source are estimated at $24 millions, a decrease of $4 millions or 14.5 percent as compared with the fiscal year 1941, despite the increase

in rates and higher income levels of the calendar year 1941 as compared with the calendar year 1939.

For the declared value excess-profits tax, taxable excess profits are those earnings in excess of 10 percent of the capital-stock valuation which is declared by corporations in filing their capital-stock-tax returns. Ordinarily capiOrdinarily capital-stock returns must be filed on July 31. However, the Revenue Act of 1941, which increased the capital-stocktax rate from $1.10 to $1.25 for each $1,000 of such valuation, was not approved until September 20, 1941, and corporations were allowed to defer the filing date for capital stock returns to October 29. In 1941, corporations, in setting capital-stock value so as to avoid declared value excess-profits tax liabilities for the calendar year 1941 earnings, had 3 months more known earnings than would have been the case without the extension in the time of filing the capital-stock returns. The consequent increase in accuracy of net income estimates, despite a substantial increase in income levels in 1941, should reduce the declared value excess-profits tax liability in 1941 as compared with 1939 when the capital-stock returns had to be filed August 31.

Some portion of the decrease in the fiscal year 1942 receipts is attributable to the suspension of the profit limiting provisions of the Vinson Act and of certain provisions of the Merchant Marine Act, 1936, during the applicable period of the excess-profits tax. Collections from these sources are included as part of the declared value excess profits.

Unjust enrichment taxes, which are back taxes principally based on liabilities incurred in the calendar year 1936, are estimated to decrease from $9 millions in the fiscal year 1941 to $5 millions as the outstanding claims for these taxes have been decreased by collections.

Current individual income-tax receipts for the fiscal year 1942, estimated at $3,070 millions, are $1,756 millions or 133.6 percent in excess of actual fiscal year 1941 receipts amounting to $1,314 millions. As is true for corporation income taxes, individual income-tax receipts for the fiscal year 1942 arise from liabilities of the calendar years 1940 and 1941, while the fiscal year 1941 receipts. reflect the calendar years 1939 and 1940. In comparing individual income-tax receipts by fiscal years, the elimination of the yield from the common year 1940 from the explanation of results is not as valid as it is for corporation income-tax receipts because of the much greater proportion of full-paid individual as compared with corporation income-tax liabilities in March of the near fiscal year. Nevertheless, the oversimplification of the explanation is substantially correct as the greater proportion of the increase in the fiscal year 1942 over the fiscal year 1941 is due to higher income levels and tax rates and broader tax base in the calendar year 1941 as compared with the calendar year 1939.

The 1939 personal exemptions of $2,500 for married individuals and $1,000 for single persons were reduced to $1,500 and $750, respectively, in 1941. The dependent credit of $400 for the first dependent was eliminated for persons who are made heads of families only because of such dependents. Surtax rates were increased throughout the entire schedule, the greatest increase being made in the low and middle income groups. Not only were the surtax rates increased but the exemption therefrom of the first $4,000 of surtax net income was eliminated. A simplified income-tax form was adopted for persons with gross income of $3,000 or less wholly from certain specified sources, the use of such abbreviated form or the regular income-tax form being optional with the taxpayer. In effect, the normal tax was increased by the defense.

tax of the Revenue Act of 1940. The defense tax as such was eliminated by the Revenue Act of 1941 and was integrated into the surtax rate structure. The combined effect of reduced personal exemptions, the elimination of exempted surtax net income, and the increase in surtax rates results in increases in tax liabilities of all classes.

Because of the great increase in the calendar year 1941 liabilities it is expected that the percent of total liabilities which has been received in full in March of previous collection years will be decreased in March 1942. The effect of increased calendar year 1941 liabilities on fiscal year 1942 collections is therefore somewhat less than would be true if the full-paid proportion were unchanged.

Total back corporation and individual income tax receipts, which are not affected by most recent changes in incomes and tax rates, are estimated at $305 millions in the fiscal year 1942.

Miscellaneous internal revenue.-Miscellaneous internal revenue in the fiscal year 1942 is estimated at $3,863 millions, an increase of $896 millions over receipts of the previous fiscal year. Except for receipts from the capitalstock tax, estate tax, and gift tax, which are estimated to aggregate $742 millions, miscellaneous internal revenue is derived from levies incident to the sales of goods or services. Ordinarily receipts from these sources are principally dependent upon consumer purchasing power. However, in the fiscal year 1942, curtailment of production of goods for civilian consumption is necessitated by defense and war increase less than the estimated income levels of the fiscal activity. of certain taxes are expected either to Receipts year 1942 warrant, or to decrease. This is particularly true of taxes based on the sale of durable consumer's goods. Nevertheless, because of the increases in receipts from taxes unaffected by military production, because of increases in tax rates, and because of the introduction of new taxes, miscellaneous internal revenue other than collections from the capital stock, estate, and gift taxes is estimated to increase from $2,381 millions in the fiscal year 1941 to $3,121 millions in the fiscal year 1942. This is an increase of $740 millions, or 31.1 percent.

Capital-stock tax receipts are estimated at $232 millions in the fiscal year 1942 as compared with $167 millions in the fiscal year 1941. The increase of $65 millions or 39.2 percent results from the increase in tax rate from $1.10 to $1.25 per $1,000 of valuation and the higher income. levels of the calendar year 1941 as compared with the calendar year 1940 and to the fact that the capital-stock declaration made in the fiscal year 1942 had to be made large enough to cover insurance against the declared value excess-profits tax for 3 years following the capital-stock valuation.

Estate-tax receipts are estimated at $360 millions, an increase of $5 millions over actual receipts of the fiscal year 1941. This increase is small, in spite of the 10 percent tax rate increase of the Revenue Act of 1940, which is partially reflected in the fiscal year 1942 receipts, because the fiscal year 1941 receipts included the taxes on two exceptionally large estates. The rate increases of the Revenue Act of 1941 are substantially ineffective with respect to the fiscal year 1942 collections because of the 15-month statutory lag permissible in the filing of estate

tax returns.

Gift-tax receipts, estimated in the fiscal year 1942 at $150 millions, are $98 millions or 189.2 percent in excess of actual receipts of the preceding year. Although the higher estate-tax rates contained in the Revenue Act of 1941 became applicable to the estates of decedents dying after September 20, 1941, the increase in the gift-tax rates

contained in the Revenue Act of 1941 was not effective on gifts made prior to January 1, 1942. Thus there was a special tax-saving incentive to make gifts during the latter months of the calendar year 1941 not only to reduce an augmented estate-tax liability but also to break up estates so that the income therefrom in subsequent years would not be subject to as high bracket rates under the increased individual surtax rates of the Revenue Act of 1941.

Total liquor-tax receipts are estimated to aggregate $1,095 millions in the fiscal year 1942 and represent an increase of $277 millions or 33.8 percent over receipts of the previous fiscal year. Receipts from taxes on distilled spirits and fermented malt liquors account for $993 millions or 90.7 percent of the total 1942 receipts and for $248 millions or 89.6 percent of the increase.

The excise-tax receipts from distilled spirits are estimated to increase $212 millions or 49.4 percent to $640 millions in the fiscal year 1942. This increase is due to the estimated rise in consumer income and to the increases in the tax rates on distilled spirits from $3 a gallon to $4 a gallon and on brandy from $2.75 a gallon to $4 a gallon. Only 9 months' collections in the fiscal year 1942 are at these new rates. The effect of the increase in rates is lessened by the forward buying which took place in the first few months of the fiscal year in anticipation of the augmented rates.

Receipts from the tax on fermented malt liquors are estimated at $353 millions in the fiscal year 1942, an increase of $36 millions or 11.5 percent over the actual fiscal year 1941 receipts. This increase is due principally to increases in income levels. The excise tax on wines is estimated to increase 139.9 percent to $27 millions mainly because of rate increases of the Revenue Act of 1941. Nonrecurring floor-stock collections from distilled spirits and wines in the fiscal year 1942 are estimated at $33 millions.

Total receipts from tobacco taxes are estimated at $772 millions in the fiscal year 1942, an increase of $79 millions or 11.4 percent over actual receipts of the fiscal year 1941. Each of the specific sources contributed to this increase but the bulk of collections is accounted for by the tax on small cigarettes, estimated at $694 millions in the fiscal year 1942. No increase in tax rates is effective in the fiscal year 1942, the increase in receipts being due principally to increases in consumer income.

Collections of stamp taxes on issues of securities, bond transfers, stock transfers, etc., and on playing cards and silver bullion sales or transfers are estimated to amount to $43 millions in the fiscal year 1942, an increase of $4 millions or 9.9 percent. In this category, only the tax rate on playing cards, increased from 11 cents to 13 cents a pack, was changed by the Revenue Act of 1941.

The broad class group, manufacturers' excise taxes, includes the majority of the specific sources of taxation that will be affected most by conversion of production to military requirements. Despite the estimated decline of some tax bases in the face of rising purchasing power, total receipts of the group are estimated to increase $110 millions or 18.0 percent to $721 millions in the fiscal year 1942. This increase is achieved by substantial upward revision of tax rates and by the introduction of new sources of revenue.

The largest receipts from any single tax classified in this category are produced by the 1%1⁄2 cents per gallon tax on gasoline. In the fiscal year 1942, this tax is expected to yield $373 millions, an increase of $29 millions or 8.6 percent due primarily to increases in income levels. The

tax rate on gasoline was raised from 1 cent to 11⁄2 cents by the Revenue Act of 1940, effective July 1, 1940. This rate was unchanged by the Revenue Act of 1941. However, because of the collection lag, only 11 months of the fiscal year 1941 receipts are affected by the 1%-cent rate, whereas the fiscal year 1942 receipts represent a full year's collection at the increased rates.

The receipts from the tax on lubricating oils are estimated to increase $6 millions or 15.1 percent to $44 millions in the fiscal year 1942. The tax on electrical energy is estimated to yield $51 millions in the fiscal year 1942 as compared with actual receipts of $47 millions. in the fiscal year 1941. The tax on firearms, shells, pistols, and revolvers is estimated to yield $4 millions in the fiscal year 1942. No change was made in the rate of tax or the tax base of these four tax categories in the Revenue Act of 1941. For all other specific sources in the manufacturers' excise-tax group, changes were made both in rates and scope of the taxes and many new taxes were introduced.

Tax rates on the automobile and related industries were doubled by the Revenue Act of 1941, affecting 8 months' tax collections in the fiscal year 1942. The rate was increased on passenger automobiles and motorcycles to 7 percent, on automobile trucks, busses, and trailers to 5 percent, on parts and accessories for automobiles to 5 percent, and on tires and inner tubes to 5 cents and 9 cents per pound, respectively. Some adjustment was made in classification under these titles. Bus chassis and bodies and truck and bus trailers, formerly taxed at the same rate as passenger automobiles and motorcycles, are now taxable at the rate applicable to trucks. The base of the automobile taxes was expanded to include certain types of trailers formerly exempt. Automobile radios, previously taxable under automobile parts and accessories, were shifted to the radio receiving set classification. Substantially larger consumer income combined with doubling the tax rate would imply relatively large increases in tax yields under ordinary circumstances. However, the automobile industry is one of the first to feel the impact of war. There are striking differences in the effect of military necessities on each of the automobile taxes. The receipts of the tax on parts and accessories show slight curtailment of civilian production. In the fiscal year 1942 receipts are estimated at $27 millions, an increase of 102.5 percent over actual receipts of the fiscal year 1941. Collections of the tax on trucks and busses are estimated to increase 54.5 percent to $17 millions in the fiscal year 1942. A substantial cut in the production of passenger automobiles is indicated by collections of $86 millions in the fiscal year 1942, only 5.4 percent more than the collections in the fiscal year 1941 when automobile prices were lower. The most drastic reduction is in production of tires and tubes for civilian consumption. Receipts from the taxes on these articles are estimated at $41 millions in the fiscal year 1942, a decrease of $10 millions or 20.3 percent. As the Nation continues in its progress toward a full wartime economy, it is to be expected that production of these items for civilian use will be reduced still further.

Many new taxes based on manufacturers' sales were introduced by the Revenue Act of 1941. These new taxes and their estimated yield in the fiscal year 1942 are: Rubber articles-articles of which rubber is the component material of chief weight-$8 millions; electric, gas, and oil appliances, $7 millions; electric-light bulbs, $2 millions; electric signs, $2 millions; washing machines-commercial $0.2 million; business and store machines, $5 millions; photographic apparatus, $6 millions; optical equip

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