During the fiscal year ended June 30, 1940, the income tax continued as the single most important source of revenue in the Federal tax structure. Collections exceeded $2,000,000,000 for the fourth consecutive fiscal period. For this four-year period (July 1, 1936- June 30, 1940) income tax collections were more than double those of the preceding four-year period (July 1, 1932 to June 30, 1936) and approximately equalled income tax collections of the seven fiscal years 1930-1936. In the fiscal year 1940, the Federal individual income tax produced $982,017,000; the corporation income and excess profits tax, $1,139,056,000; a total of $2,121,073,000. This constituted 37.3 per cent of total Federal internal revenue and customs.
State income tax collections for 1940 amounted to an estimated $345,916,000. This represented 8.5 per cent of estimated total 1940 state tax revenues.
Individual Income Tax.
The Revenue Act of 1940 made important changes in the Federal individual income tax for taxable years beginning after Dec. 31, 1939. Among the changes effected, were the lowering of personal exemptions and filing requirements, increasing the surtax rates in the middle brackets and imposing a temporary additional tax for defense purposes.
Personal exemptions were lowered from $2,500 to $2,000 in the case of married persons and heads of families, and from $1,000 to $800 in the case of single persons. No change was made in the $400 credit allowed for dependents.
The requirements as to filing income tax returns have also been changed. Under prior law, an individual was required to file a return if his net income amounted to $1,000 or more in the case of a single person, or $2,500 or more in the case of a married person, and, in either case, if his gross income was $5,000 or more. The Revenue Act of 1940 requires a return from a single person if his gross income is $800 or more, and from married persons if either their separate or aggregate gross income is $2,000 or more.
The surtax rates were increased on amounts of surtax net incomes in excess of $6,000 and the increases continue up to amounts of surtax net incomes not in excess of $100,000. From that point onward, the rates of prior law are retained.
The tax on nonresident alien individuals not engaged in business or having an office within the United States has been increased generally from 10 per cent to 15 per cent on dividends, interest, or other fixed or determinable annual or periodical income derived within the United States.
A temporary increase in the income tax for purposes of national defense for taxable years beginning after Dec. 31, 1939, and before Jan. 1, 1945, was also imposed. This defense income tax applicable to residents and nonresidents is equal to 10 per cent of the total income tax, with the provision that such increase shall not be greater than 10 per cent of the net income remaining after the income tax as determined without regard to the defense tax.
There were no additions in 1940 to states which have individual income taxes. At present, 31 states and the District of Columbia have general income taxes. Four other states tax income from intangibles only. Aside from the District of Columbia law which was enacted in 1939, all state income tax laws were enacted in 1937 or prior years. For the year 1940, revisions included rate increases in Louisiana and Mississippi, extension of the New York State emergency tax of 1 per cent through 1941 and repeal of the surtax on interest and dividends in South Carolina.
An innovation in individual income taxation occurred in December, 1939, when an income tax was imposed by the City of Philadelphia, the only city to impose a tax of this type. The rate is 1½ per cent on wages, salaries and other compensation, and on net profits of unincorporated business, professions and other activities. No personal exemptions or credits are allowed. In the case of residents of Philadelphia, the tax applies to all taxable income regardless of the place derived, and, in the case of nonresidents, to taxable income derived within the city.
During the calendar year of 1939, 6,303,890 Federal individual income tax returns were filed, approximately half of which were taxable. The net income shown on taxable returns filed in 1939 exceeded $12,000,000,000, and the tax liability was $765,887,000, indicating a 6.04 per cent average effective tax rate on the net income of taxable returns. 57 returns showed net incomes of $1,000,000,000 and over. These reported a total net income of $110,103,000, and indicated a total tax liability of $48,035,000.
Corporation Income Tax.
The Federal corporation income tax rates applicable to taxable years beginning after Dec. 31, 1939, were revised by both the Revenue Act of 1940 and the Second Revenue Act of 1940. The Revenue Act of 1940 increased corporation income tax rates and imposed a temporary additional tax for defense purposes. The main provisions of the Second Revenue Act of 1940 were the further increase in the rate of income tax on corporations with normal-tax net income of more than $25,000, the imposition of an excess profits tax on corporations and liberalized amortization on emergency facilities for defense purposes.
The Revenue Act of 1940 increased the corporation income tax rates 1 per cent, thus the general rate on corporations was increased from 18 to 19 per cent. A similar increase was effected in the rate of tax on foreign corporations having an office or place of business in the United States. Foreign corporations not engaged in trade or business in the United States and not having an office or place of business therein, are taxed at a uniform rate of 15 per cent upon dividends, interest, or other fixed or determinable periodical or annual income derived in the United States. Formerly, the general rate was 15 per cent except on dividends which were taxed at the rate of 10 per cent. A defense income tax applicable to taxable years beginning after Dec. 31, 1939 and before January 1, 1945, was also imposed upon corporations, equal to 10 per cent of the corporation income tax as determined without regard to the defense tax.
Under the Second Revenue Act of 1940, the income tax rate for corporations with normal-tax net income in excess of $25,000 was increased by 3.1 per cent. The total tax rate, including the defense tax, is, therefore, 24 per cent for taxable years beginning after Dec. 31, 1939. For corporations with normal-tax net incomes only slightly in excess of $25,000, an alternative tax is provided. For corporations with net income of not more than $25,000, the graduated rates of tax ranging from 14.85 to 18.70 per cent (including the defense tax) imposed by the Revenue Act of 1940 continue.
The excess profits tax provides for taxes ranging from 25 to 50 per cent of excess profits net income which exceed the excess profits credit plus a specific exemption of $5,000. Excess profits net income consists of net income subject to the income tax with certain adjustments, among which are the exclusion of long-term gains and losses, and the deduction of the amount of the income tax and dividends received. The excess profits credit under the excess profits tax law, is, according to the selection of the taxpayer, equal to 8 per cent of invested capital (equity invested capital plus 50 per cent of borrowed invested capital) or 95 per cent of excess profits net income for the base period 1936-39. Provision is made for the exemption of certain types of income and corporations, and the Commissioner of Internal Revenue is given authority to make such adjustments of abnormalities in income and capital of the taxpayer as are necessary to determine accurately excess profits tax liability.
Special amortization allowances, in lieu of the depreciation provisions under the Internal Revenue Code, have been made for emergency facilities necessary for national defense. Upon certification of the Advisory Commission to the Council for National Defense and either the Secretary of War or the Secretary of the Navy, the cost of certain facilities may be written off over a period of 60 months (or less if the emergency period ends in less than 60 months). See also AVIATION: Financing the Expansion Program.
The Second Revenue Act of 1940 also suspended the profit-limiting provisions of the Vinson-Trammell Act and certain provisions of the Merchant Marine Act of 1936.
There were no additions during 1940 to the list of 32 states and the District of Columbia which had corporate income taxes. Revisions, increasing the rates, were effected during the year in Louisiana and Mississippi.
Federal corporation income tax returns for 1938 indicate that approximately 521,000 returns were filed in 1939, of which 170,000 showed net income, and 301,000 showed no net income, while 50,000 corporations were inactive. The active corporations reported a gross income of $120,000,000,000, deficit corporations accounting for $40,000,000,000. Net income corporations reported a total net income of $6,500,000,000, and those with no net income reported deficits aggregating $2,900,000,000. The returns with net income indicated a total tax liability on 1938 income of $860,000,000, including $854,000,000 income tax, and $6,000,000 excess profits tax. See also TAXATION.
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