1942: Sales Tax

Source of Revenue and Deflationary Measure.

The rapidly mounting costs of the war magnified the need for new revenues. At the same time, the growing gap between increased purchasing power and diminished stocks of civilian supplies raised the threat of inflation. As a solution to both problems, proposals for a federal sales tax were vigorously supported by certain groups and several attempts were made during 1942 to secure the passage of such a law. The Chamber of Commerce of New York State recommended to Congress early in the year a 5 per cent nation-wide retail sales tax estimated to yield approximately $4,000,000,000. This was followed by a plan, endorsed by the National Association of Manufacturers for a 4 per cent manufacturers' sales tax imposed at the point of final sale, and a 4 per cent tax on general consumption. As an alternative, the latter organization suggested a flat 8 per cent war consumption tax. These proposals were expected to yield $4,400,000,000 and $4,800,000,000 respectively. Various other business groups and associations recommended general sales tax and manufacturers' sales tax measures.

General Sales or Turnover Tax.

The general sales or turnover tax is a tax upon the transfers of all commodities and services at all levels of trading. Levied on every transaction, the general sales tax may therefore be paid once, or several times on a given commodity, depending upon the number of layers of exchange between original sources of raw materials and the final stage of sale to the consumer. A manufacturers' tax, on the other hand, is imposed only on one sale of a product, usually at the point of origin, or at the first stage of wholesale distribution. Retail sales taxes are collected only once at the time of the sale to the final user who does not intend to resell the article.

Sales taxes are large revenue producers, especially during periods of rising prices and increased volume of trading. They have the further advantage of elasticity (i.e., of being easily adjusted as to rates to produce higher yields), and of stability, in providing revenues which are unaffected by wide fluctuations in income or property values. In addition, as soon as they go into effect, sales taxes begin to draw purchasing power from the pockets of buyers. They may thus serve as a useful means of curbing inflation. Moreover, there are few serious problems in administration of the sales tax. For these reasons, sales taxes are particularly attractive as wartime emergency measures.

Opponents of sales taxation point out, however, that the sales tax is not levied directly on the taxpayer and therefore no allowances are made for differences in economic status. The burden of taxation falls more heavily on those of the lower income groups who spend the greater part of their earnings on the necessities of life. They also show that a general sales tax, in particular, is inequitable because of the fact that, being superimposed on each sale, the pyramiding of the tax in the course of successive sales is unavoidable. This results in multiple burdens and discriminates in favor of vertical business combinations. Finally, while they do not altogether deny that the sales tax may succeed in producing some deflationary results, they argue that this end may be achieved by other and more equitable methods. They emphasize the point that as an instrument of inflation control, the sales tax is too crude, taxing all classes of goods at the same rate, whether plentiful or scarce, cheap or costly, necessity or luxury. It raises the cost of living, stimulates the demands for higher wages, and makes price control more difficult.

Spendings Tax.

Despite some of its shortcomings, especially its regressivity, a fair amount of sentiment has nevertheless developed in favor of the sales tax as an emergency measure for the duration of the war. The Administration has, however, steadfastly opposed the measure. As a substitute proposal, the Treasury endorses the 'spendings tax.' Such a tax, designed as an inflation control device, exempts a minimum standard of living, imposes progressive rates on aggregate spendings, and provides strong financial inducements to save.

Adaptation of Sales Taxes.

Sales taxes of various types have been a part of the tax systems of European nations for a generation or longer. In Canada, they have been successfully employed for two decades, and have become an important element of national taxation in the countries of South America. Although no Federal tax of this form has been adopted in the United States since the Civil War period, sales taxation came into use on a rather wide scale among the states during the last decade. In the search for emergency sources of revenue during the depression years, one state after another adopted sales taxes until twenty-eight states had passed various types of sales tax legislation. In 1942 twenty-two states were collecting sales tax revenues in excess of a half billion dollars. Tax rates ranged from ½ per cent to 3 per cent. Louisiana joined these states in 1942 by enacting a new sales and use tax of 1 per cent. In addition, New York City imposes a retail sales tax of 1 per cent.