1941: Sales Tax

Turnover Tax.

Interest in the pros and cons of sales taxation was suddenly revived in the closing days of 1941 as the Federal Government began casting about for new and important sources of revenue. Among the many proposals submitted for consideration by the House Ways and Means Committee for the raising of an additional $5,000,000,000-$6,000,000,000 in Federal revenues, few have the fiscal and administrative virtues of adequacy of yield, elasticity of revenue production, and simplicity of operation possessed by a general sales or turnover tax. The form of tax that has received the greatest attention as a possibility in a revamped emergency Federal tax structure is a turnover tax on all gross sales or leases of goods, wares, commodities and properties. In addition, such a levy would include a tax on services such as transportation, utilities, and professional and business services; on rents and royalties collected for the use of properties and patents, and on interest, fees, commissions and charges collected by bankers, brokers, agencies and commission merchants. In short, a tax of this kind would be payable on virtually every exchange transaction throughout the nation. Because of the huge volume of transactions (gross receipts of corporations, alone, are conservatively estimated at $200,000,000,000), a tax as low as 1 or 2 per cent on each turnover would yield tremendous revenue. Moreover, such a tax would rise directly in proportion to price increases, and because of its limiting influence on purchasing power would help to check inflationary tendencies. Furthermore, it is argued that taxes that tend to be shifted upon the buyer in the form of higher prices appear less burdensome to the average taxpayer, and hence prove to be more popular.

In spite of these advantages, general sales taxation has the obvious defect of causing an inequitable distribution of tax burdens. Since the rates are proportional all buyers, rich and poor, are treated alike. This results in regressivity relative to income levels for among the lower-income groups the bulk of the income is spent for taxable goods and services, while in the upper brackets of income there is more opportunity for avoidance through savings and investment policies. A larger percentage of the lower incomes than of the higher incomes thus goes for sales taxes. In addition, turnover taxes generally result in pyramiding, so that the final consumer bears a cumulative burden in an amount greater than the sum which the Government collects. This is caused by the familiar trade practice of computing mark-up on the basis of cost. As costs are swelled by the accumulated amount of turnover taxes, the figure which serves as the basis for calculation of mark-up is correspondingly increased — resulting in the quotation of still higher prices to the consumer. Furthermore, where conditions in a given trade make forward shifting relatively more difficult if not impossible, the tax becomes severely discriminatory with respect to those firms that are forced to assume the burdens themselves.

New Sales Taxes.

Existing levels of general sales taxation continued to prevail among the states almost without alteration. No new sales taxes were adopted in 1941 with the exception of the 2 per cent retail sales and use tax in the city of New Orleans which replaced the former 1 per cent tax that had been abandoned in 1940. A number of states: Colorado, North Dakota and Oklahoma, extended the life of sales or use taxes, and New York City was granted permission by the New York legislature to do likewise. Minor changes were made in sales tax rates in several other states.

Changes in the Selective Commodity Tax.

More significant changes occurred in the selective commodity tax structure. Sweeping revisions were made in the Federal excise taxes in the Revenue Act of 1941. The long list of defense tax rates on cigarettes, liquors, firearms, oil and gasoline, securities transfers, passage tickets and box seats, which were to have been reduced by 1945 were declared permanent. Sizeable increases were made in the rates on playing cards, wines, distilled spirits, tires and tubes, automobiles, refrigerators and radios, and on admissions, club dues, and telephone and telegraph messages. New manufacturer's excises of 10 per cent were imposed on business and store machines, commercial washing machines, electric gas and oil appliances, optical equipment and sporting goods. Retailer's excises of 10 per cent were placed on furs, jewelry and toilet preparations.

The state legislatures also boosted selective commodity tax burdens. Seven states increased the tax on wines and liquors; four states imposed higher rates on gasoline; two states enacted new taxes on tobacco products, and two states provided for additional taxes on gross receipts of utilities. In a few instances, reductions were made in state excise rates. Two states passed new chain store taxes of a restrictive or punitive character.

With these additions to the selective commodity tax lists, it should be recognized that substantial increases occurred in the total indirect tax burdens of the nation. Although direct taxes — chiefly in the form of payroll and income taxes — will in all probability increase during 1942-1943 there is some likelihood that the pressure for additional revenue may result in further indirect taxation. A national general sales or turnover tax is a distinct possibility in the near future.