1941: Taxation

Federal Taxation.

Expenditures.

All previous records of public expenditure were destined to be shattered as Congressional appropriations, contract authorizations and Reconstruction Finance Corporation commitments reached a total of $74,440,000,000 in authorized war funds. While such authorizations were not immediately reflected in disbursements of similar size they represented an unmistakable trend toward significantly higher levels of expenditure. Month after month, as the machinery for spending was shifted into higher gear, average daily Treasury payments continued to mount. The effort of the nation to adjust itself to a vast Federal spending program of such astronomical proportions requires a period of time, and the full effect of this Congressional action will not be felt before 1943.

For the 1941 fiscal year ending June 30, 1941, total expenditures were $12,775,000,000, or over $3,000,000,000 greater than the level of expenditures in the previous fiscal year. The increases of approximately $4,500,000,000 in national defense costs and of $70,000,000 in higher interest charges on the public debt more than account for this rise. The War Department, alone, spent almost $3,000,000,000 more than in the 1940 fiscal year. The Navy Department accounted for a further rise of $1,250,000,000. The balance of increased defense funds went for selective service expenses, emergency ship construction, national defense housing, lend-lease defense aid, and miscellaneous defense funds allocated to the President. Substantial reductions in disbursements by the PWA, the WPA, and by various administrative agencies related to agriculture, coupled with the increases in credits from several revolving funds helped to pare this broad expansion in costs.

Expenditures in the first half of the 1942 fiscal year almost equaled the total payments for the entire fiscal year of 1941. By Dec. 31, 1941, a six-month record disbursement of $11,553,000,000 had been made, of which more than $8,000,000,000 was for national defense and lend-lease aid.

Revenues.

Revenues in the 1941-42 fiscal years rose rapidly. In the year ending June 30, 1941, net receipts stood at $7,607,000,000 against $5,925,000,000 in the previous fiscal year. For the first half of the 1942 fiscal year net revenues were $4,166,000,000 or approximately $1,500,000,000 higher than in the corresponding period of the 1941 fiscal year. Important changes that had been made in income tax structure during 1940, combined with the fact that there was a noticeable rise in the level of national income, were chiefly responsible for these increased receipts. The balance of the additional revenue was derived largely from the higher excise tax rates that were imposed upon liquor, tobacco and miscellaneous manufactured goods. Total income taxes (on individuals and corporations) produced almost $3,500,000,000 during the 1941 fiscal year, and miscellaneous internal revenues. including excises, estate and gift taxes accounted for approximately $3,000,000,000 more. Social security taxes amounted to $788,000,000 and customs duties were $392,000,000. Miscellaneous receipts consisting of tolls and seignorage, interest income, and special taxes made up the balance.

Changes In Income Tax Rates.

Despite the significant increases in tax receipts, expenditures continued to exceed revenues by substantial margins. To the cumulative deficit of the preceding decade there was added a $5,000,000,000 excess of expenditures in 1941 and a further deficit of $7,333,000,000 in the first six months of the 1942 fiscal year. This brought the gross public debt of the Federal Government to $58,000,000,000 by Dec. 31, 1941.

The Revenue Act of 1941 was prepared with the avowed purpose of raising from $3,000,000,000 to $3,500,000,000 in new revenues for financing the defense program. The new law, amending the Internal Revenue Code, lowered personal exemptions, provided for an increase in income tax rates, both individual and corporate, and extended the surtax to apply to all incomes. It also imposed higher excess profits taxes, capital stock taxes, and estate and gift taxes, raised existing excise tax rates and introduced many new excises.

The personal exemption in the case of married persons was reduced from $2,000 to $1,500 and for single persons from $800 to $750. By thus broadening the base and requiring that every citizen or resident with gross incomes equal to or greater than these amounts must file a return, whether or not a tax is payable, the law automatically paved the way for a record-breaking number of returns of probably more than 22,000,000 individuals.

To simplify the collection of the tax, two revised forms of returns were provided. The one, applicable to all persons whose gross income is more than $3,000, is similar to income tax forms previously in use. The other, optional for those with incomes of $3,000 or less which were derived only from salaries, wages and compensation for personal services, dividends, interest, rent, annuities or royalties, permits simplified computation of taxes based upon a rate schedule applicable to gross income. By referring to this table the taxpayer may determine his tax liability with a minimum of calculation and listing of details. On this simplified form tax burdens for single persons range from $1 to $197 for incomes between $750 to $3,000 respectively, and for married persons from $1 to $123 on incomes from $1,500 to $3,000.

The normal tax of 4 per cent on all taxable income remained unchanged. However, the graduated surtax which formerly applied to taxable income in excess of $4,000 was made to apply to the first dollar of income in excess of personal exemptions and credits. Surtax rates in the new act were graduated from 6 per cent on the first $2,000 taxable income to 77 per cent of income in excess of $5,000,000.

Changes in Corporation Tax Rates.

The rates of tax applicable to corporations were graduated from 15 to 19 per cent for corporations having net income of $25,000 or less, and were fixed at 24 per cent for companies with net income above $25,000. In addition, surtaxes of 6 per cent on corporate income up to $25,000 plus 7 per cent of the excess over $25,000 were imposed. The capital stock tax was raised from $1.10 to $1.25 for each $1,000 of adjusted declared value of capital stock. Excess profits tax rates were raised to range from 35 per cent (on excess profits net income up to $20,000), to 60 per cent on amounts over $500,000. A reduction was also made in the credits against the tax allowable under the law. The basic estate tax rates were allowed to remain unchanged but slight increases in rates were made in the additional estate taxes and in the gift tax rate structure. New excise taxes on sales, facilities, occupations and use were added over a broad range of goods and services including: manufacturer's excises of 10 per cent upon business and store machines, commercial washing machines, electric gas and oil appliances, and optical equipment; retailer's excises of 10 per cent upon furs, jewelry and toilet preparations, and a variety of imposts on transportation services, amusements, motor vehicles and boats. Existing rates on admissions, playing cards, alcoholic beverages, tires and tubes, automobiles, refrigerators, radios were increased.

State and Local Taxation.

Education continued to be the largest single item of state and local cost, followed by highways, welfare, health and sanitation and police and fire protective services, in order of financial importance. No substantial changes occurred in the costs of these services and state and local expenditures remained at approximately the $10,000,000,000 level. Modest increases were seen in tax collections, however, resulting in some reductions in deficit financing. This tended to encourage demands voiced in a considerable number of localities that the tax burdens be pared in view of higher Federal taxes. State collections for 1941 amounted to more than $4,000,000,000 compared with $3,877,000,000 in 1940, while local collections were estimated at $4,790,000,000 against a 1940 total of $4,661,000,000. Property taxes supplied the bulk of local revenues, accounting for approximately $4,500,000,000. This source was supplemented by general and selective sales and use taxes, income, motor vehicle taxes, and local administrative charges. State revenues were drawn primarily from gasoline and general sales taxes, and from income, payroll, motor vehicle, property and alcoholic beverage taxes. Utility and franchise taxes, inheritance taxes and miscellaneous excises supplied additional state revenues. During the year a few states adopted new taxes or raised existing tax rates notably on gasoline, liquor, tobacco and utilities, while others repealed certain revenue measures, such as the elimination by New York of its 1 per cent emergency tax on personal incomes, or the South Dakota reduction in income tax burdens. Most of the temporary tax legislation was continued in force.

However, no important changes in tax policy were in evidence. The net effect therefore was that with state and local revenue structures remaining substantially the same, total tax burdens were mainly influenced by and varied directly with the revenue policies of the Federal Government.

War Taxation.

As the United States approached its role as an active participant in an all out war against the Axis, it was spending at the rate of $2,000,000,000 a month. This was equivalent to $180 per person, or about one-fourth the national income. To compare these costs on any accurate basis with those of other countries at war, is virtually impossible because of the lack of reliable data, differences in accounting, and variations in price levels, labor costs and other factors. However, on the basis of the best information obtainable it would appear that Great Britain now spends more than $50,000,000 a day, $18,000,000,000 per year, and $350 per capita. Canada is diverting $2,650,000,000 (which is 40 per cent of her national income) for the use of the Federal Government. Of this sum, five-sixths is directly for the war effort. Conservative estimates for Germany and the occupied countries show that $30,000,000,000 per annum is being spent currently for the conduct of the war. This is almost twice the figure estimated for the German nation in 1939-40 and easily represents two-thirds of the total income within Germany and the conquered areas. Japan's budget for the fiscal year starting April 1, 1941, was $3,000,000,000. This was by far the largest expenditure program in Japan's history; yet as a result of the intensification of the war, this budget has probably been materially increased. The greater proportion of these expenditures was financed through borrowing. Russia spent at least $10,000,000,000 in 1941 and as the tempo of the war with Germany increased, it is likely that this level was sharply raised. War expenditures for Italy probably exceeded $2,000,000,000 per annum.

The attack on Pearl Harbor in December 1941 which definitely forced the United States upon an immediate war footing, resulted in drastic upward revisions in financial estimates. In a dramatic budget message to Congress, President Roosevelt stressed the nation's determination to 'pay whatever price we must to preserve our way of life.' His estimates, purely tentative, and subject even to further upward revisions with the changing fortunes of war dwarfed by comparison the unprecedented expenditure level of 1941. It was calculated that for the fiscal year of 1942 defense expenditures would come to $24,000,000,000 and that total costs would amount to more than $30,000,000,000. Revenues were expected to yield $12,000,000,000, leaving a deficit in excess of $18,000,000,000. For the 1943 fiscal year, the President called for a budget with total expenditures of $59,000,000,000, of which $52,000,000,000 would be for war expenditures, including Army, Navy and lend-lease costs. This would involve a speed-up in the rate of war spending to $5,000,000,000 a month by 1943. It is equivalent to $444 per person or more than half the anticipated national income for that period. To meet these expenditures, the President proposed added tax burdens of $9,000,000,000 in social security taxes, income, excess profits, estate, gift, and excise taxes. It was estimated that this increase in taxation combined with existing tax burdens, would bring total receipts to $27,000,000,000. Heavy deficits are expected to accompany even this high level of taxation with the result that the national debt will probably soar to $110,000,000,000 or more, with an annual interest bill of $2,500,000,000. See also BUSINESS; FINANCIAL REVIEW; INCOME TAXATION; BUDGET OF THE UNITED STATES; NATIONAL DEBT; SALES TAX.