1939: Income Taxation

During the fiscal year ended June 30, 1939, Federal income tax collections for the third consecutive fiscal period exceeded $2,000,000,000. Total collections for the past three fiscal years approximately equal those of the preceding six fiscal years (July 1, 1930-June 30, 1936) and slightly exceed the combined collections of the three years 1928-1930. In fiscal year 1939 the individual income tax produced $1,928,834,000; the corporate income and excess-profits tax $1,149,597,000. Collectively they accounted for 39.6 per cent of total Federal internal revenue and customs.

State income tax collections for 1938, the last year for which data are available, amounted to an estimated $249,000,000 from the individual income tax and $188,000,000 from the corporation income tax. Together they represented 11.3 per cent of total 1938 state tax revenues.

Public Salaries Tax Act.

The most striking feature of 1939 Federal individual income tax legislation was the enactment of the Public Salaries Tax Act of 1939. It subjects to the Federal income tax the wages and compensation of all state and local officers and employees, regardless of the nature of their office or employment. In addition, it enables state and local governments to impose non-discriminatory taxes on the compensation of all Federal officers and employees. This legislation applies to compensation received after Dec. 31, 1938.

Hitherto, because of what were thought to be constitutional prohibitions, the Federal income tax did not apply to the compensation of most state and local employees, although it applied to the compensation of all Federal officers and employees. For the same reason state income taxes generally applied to the compensation of state and local officers and employees, but not to salaries of Federal officers and employees.

It is estimated that as of Dec. 31, 1937, active state and local government employees numbered 2,622,000 and received an annual compensation of $3,648,000,000. However, since approximately 40 per cent of all state and local employees receive a compensation of $1,000 or less and approximately 90 per cent receive a compensation of $2,500 or less, only a portion of state and local employees will actually be subject to Federal income taxation under the present deductions, personal exemptions, and credits for dependents. This legislation is expected to add $16,000,000 to annual Federal income tax collections.

Taking advantage of the Public Salaries Tax Act, 16 states and the District of Columbia passed legislation in 1939 providing for state taxation of the compensation of Federal officers and employees. A number of additional states can tax the salaries of Federal employees without special legislation. However, individual income is at present taxed in only 31 states and the District of Columbia. Therefore, not all of the 1,167,000 active Federal civilian and military personnel which (as of 1937-1938) received an annual compensation of $1,859,000,000, will now become subject to state income taxation. (See also UNITED STATES: Taxation.)

Other Changes.

During 1939 numerous other changes were made in individual income taxation. Congress enacted a local income tax for the District of Columbia, with rates ranging from 1 to 3 per cent. This represents the only addition to the list of income taxes during the year. In North Carolina and Oregon the tax rates were increased, and in New York and Wisconsin temporary rate increases scheduled to expire were extended. In Pennsylvania a constitutional amendment was proposed to permit the taxation of individual income at progressive rates, while in Nevada a constitutional amendment was proposed to prohibit income taxation. A number of other states made structural revisions in their income taxes providing, among other things, for the taxation of interest derived from Federal securities when such interest becomes taxable by state governments. Finally, mention may be made of the adoption of community property by the State of Oklahoma, as a result of which (subject to certain limitations) the combined income of two spouses is considered to belong one-half to the husband and one-half to the wife and may be taxable half to each, the husband and the wife.

Individual Income Tax Returns.

During the calendar year 1938 approximately 6,350,000 Federal individual income tax returns were filed, 53 per cent of which were taxable. This represented an increase of 17.3 per cent over the total number of returns filed during the preceding year. The net income shown on taxable returns filed in 1938 exceeded $15,000,000,000 and represented a tax liability of $1,142,000,000, indicating a 7.5 per cent average effective tax rate on the net income of taxable returns. The 49 returns with net incomes of $1,000,000 and over, reported a total net income of $85,000,000 and indicated a total tax liability of $61,000,000.

The Revenue Act of 1939.

The Revenue Act of 1939 revised the Federal income tax rates applicable to corporations by imposing a flat rate tax of 18 per cent on corporations with normal-tax net income of more than $25,000. This rate replaced the combination of a 19 per cent rate and a 2½ per cent dividends paid credit provided by the Revenue Act of 1938. The rates on small corporations — those having normal-tax net incomes of not more than $25,000 — which comprise about 90 per cent of all corporations filing taxable returns, were left undisturbed by the new act. Such corporations are subject to rates ranging from 12½ per cent to 16 per cent. Banks and insurance companies previously were subject to a flat rate of 16½ per cent, regardless of the size of their income. Under the new act they are taxed at the rates applicable to other corporations.

The Revenue Act of 1939 also altered the provisions respecting corporate capital losses. Under the Revenue Acts of 1934 to 1938 the deduction for capital losses of corporations was limited to $2,000 plus capital gains. The Revenue Act of 1939 repealed this limitation except with respect to personal holding companies. It permits corporations, which have sustained capital losses on assets held for more than 18 months, to apply such capital losses in full against their ordinary income for the taxable year in which the loss was realized. In the case of capital losses on assets held for not more than 18 months, the corporations are permitted to offset such losses only against gains from assets held not more than 18 months, but are permitted to carry over the excess loss into the next year to be applied against the short-term gains of such year.

Another significant provision of the Revenue Act of 1939 applies to individuals and corporations. It allows net operating business losses sustained in 1939 and thereafter to be carried forward for a period of two years. The taxpayer sustaining a net operating loss in 1939, is permitted to carry over such operating loss and reduce his income for 1940, and if such net loss is in excess of his net income for 1940 he can carry over such excess and reduce his income for 1941.

The Revenue Act of 1939 included several additional changes of a more restricted scope than those described, comprising largely revisions and refinements in the computation of taxable net income.

Corporation Income Tax Returns.

Federal corporation income tax returns for 1937 indicate that 529,000 returns were filed in 1938, of which 192,000 showed net income and 286,000 showed no net income, while 51,000 corporations were inactive. The active corporations reported a gross income of $142,000,000,000, deficit corporations accounting for $33,000,000,000. Net income corporations reported a total net income of $9,635,000,000 and those with no net income reported deficits aggregating $2,281,000,000. These returns indicated a total tax liability on 1937 income of $1,276,000,000 including $1,057,000,000 normal tax, $176,000,000 surtax on undistributed profits, and $43,000,000 excess-profits tax.

State governments also made revisions in their corporate income taxes. However, the only addition to the list of taxes is the 5 per cent District of Columbia tax on the income of corporations. At the close of 1939 corporate income was taxable in 32 states and the District of Columbia. See also BUSINESS.