(b) Under the House bill an exemption of 100 wine gallons is allowed retail dealers in the case of floor-stocks taxes imposed upon distilled spirits. Your committee is of the opinion that no exemption should be allowed. The allowance of an exemption would give an opportunity for the retail trade to stock up with tax-paid liquor prior to the time the increased rates were effective.

(4) Your committee has changed the tax with respect to admissions. Under existing law admissions of 40 cents or less are exempt from tax. Admissions of over 40 cents are subject to a tax at the rate of 1 cent on each 10 cents or fraction thereof. While the House bill did not change the rate of tax under existing law, it exempted only admissions of less than 31 cents. Your committee has provided the following rates for taxing admissions, which will considerably increase the revenue derived from this source over that produced by the House bill.

Admissions up to and including 9 cents..

No tax

Admissions of more than 9 cents and less than 20 cents 1 cent.
Admissions of 20 cents or more..

1 cent on each 10 cents or fraction thereof.

The 1-cent tax will apply to admissions from 10 to 19 cents, both inclusive. An admission of 20 cents will be taxed at 2 cents. Admissions from 21 to 30 cents will be taxed at 3 cents; admissions from 31 to 40 cents will be taxed at 4 cents; and admissions from 41 to 50 cents will be taxed at 5 cents. Admissions over that amount will be taxed at 1 cent for each 10 cents or fraction thereof.

(5) A few minor changes were made in the income-tax provisions. (a) The rate of tax on foreign corporations not engaged in trade or business in the United States and not having an office or place of business therein, which in the case of dividends is 10 percent under existing law, was changed to 15 percent instead of 11 percent as provided in the House bill and the rate of tax on other fixed or determinable income, which under the existing law is 15 percent and under the House bill was changed to 16 percent, is left at 15 percent. These changes were deemed necessary so that the same rate of tax will apply to foreign corporations not engaged in trade or business within the United States and not having an office or place of business therein as applicable to nonresident alien individuals of like character. The temporary defense tax increases this 15-percent rate for the five-year period to 161⁄2 percent.

Since these taxes are withheld at the source, it is impossible for the withholding agent to determine in many cases whether the actual recipient of the income is a corporation or an individual. Any differential between the corporate rate and the individual rate can be easily avoided and will cause substantial administrative difficulty. For these reasons the House bill was changed in this respect. Corresponding changes are made with respect to the rate of withholding.

(b) Under the House bill a trust was required to file an income-tax return if the gross income for the taxable year was $100 or over. Your committee believes that this puts an undue burden upon the fiduciary and will result in the filing of unnecessary returns. Accordingly the bill is changed so that a trust is only required to file a return where its net income for the taxable year is $100 or over or its gross income is $800 or over. An individual is not required to file a return unless his gross income is $800 or over.

(7) The temporary taxes, imposed for the 5-year period, are referred to in the House bill as "supertaxes." Your committee has amended the bill so that these taxes will be designated as "defense taxes" instead of "supertaxes."

REVENUE ESTIMATES

The following table prepared by the Treasury Department shows the additional revenue under the committee bill:

Estimated additional revenue1 attributable to the proposed Revenue Act of 1940

1 Excluding (a) the nonrecurring collections of floor taxes on alcoholic beverages, estimated for fiscal year 1941 at $27,000,000 and (b) revenues resulting from the extension of certain excise taxes as provided in title II, "sec. 209. Continuation of Excise Taxes," but including the defense tax on such excise taxes As reported by the Senate Finance Committee June 17, 1940.

Treasury Department, Division of Research and Statistics, June 17, 1940

It will be noted that despite the elimination of the tax on tobacco and tobacco products, your committee bill raises about $3,000,000 more than the House bill. This is due to the change in the admissions tax, and the increased tax on rectified spirits.

(8) Your committee has amended the House bill to provide that the President is hereby authorized and directed to reduce appropriations for the executive branch of the Government for the fiscal year ending June 30, 1941 (except appropriations for national defense, fixed charges, and trust funds), in such manner that the total amount of such reductions shall not be less than 10 percent of the total amount of the appropriations affected. Such reductions in appropriations shall be impounded and returned to the Treasury.

(9) Your committee added an amendment terminating on the date of the enactment of the Revenue Act of 1940 the power and authority of the President and the Secretary of the Treasury under the Silver Purchase Act of 1934, with respect to the acquisition of foreign silver, and also repealing the internal-revenue tax on transfers of any interest in silver bullion contained in section 1805 of the Internal Revenue Code.

(6) Your committee has added to the House bill a provision to the effect that articles subject to the manufacturers' excise taxes which prior to July 1, 1940, were delivered under leases, contracts of sale, or conditional sales, shall be subject to tax with respect to payments made after June 30, 1940, on the basis of the rates in effect prior to July 1, 1940, and not at the increased rates.

TITLE I-PERMANENT CHANGES

These changes apply to income taxes for taxable years beginning after December 31, 1939. They are, therefore, applicable to 1940 incomes.

(1) The personal exemptions allowed individuals for income tax purposes under the existing law have been reduced 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. The bill does not affect the $400 credit for dependents allowed under existing law. This credit is allowed if the dependent receives his chief support from the taxpayer and is under 18 years of age or incapable of self-support because mentally or physically defective.

(2) The surtaxes are increased on surtax net incomes in excess of $6,000 and the increases continue up to surtax net incomes not in excess of $100,000, and from that point the rates of existing law are retained. Under the present law, the rate on surtax net incomes in excess of $100,000 and not in excess of $150,000 is 58 percent. While the rates applicable to surtax net incomes in excess of $100,000 are not increased, the surtaxes payable by taxpayers in these upper brackets are increased by reason of the higher rates in the lower brackets.

(3) The requirement as to filing income-tax returns in the case of ndividuals has been changed. Under the existing law, an individual s required to file a return if his net income amounts to $1,000 or more n 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 is $5,000 or more. The bill requires a return from a single person if his gross income is $800 or more and from married persons if either their aggregate or separate gross income is $2,000 or more.

(4) Nonresident aliens: Under existing law, a nonresident alien individual not engaged in business within the United States or not having an office or place of business therein, is taxed only upon dividends, interest, or other fixed or determinable annual or periodical income at the rate of 10 percent. This rate may be reduced to 5 percent in the case of a resident of a contiguous country if so provided by treaty. Subject to treaty provisions with foreign countries, the 10 percent rate has been increased to 15 percent, which corresponds to the proportionate increase in burden imposed upon American citizens and residents by the increases in income and excise taxes under the bill. Under existing law, if such a nonresident alien individual has a gross

income of more than $21,600, which is the level at which the average effective rate equals 10 percent, he is subject to the full normal and surtax on his fixed or determinable annual or periodical income. The bill raises this level to $24,000 which, under the increased rates, is the point which equals an effective rate of approximately 15 percent. Nonresident aliens engaged in business in the United States or having an office or place of business therein are subject to the same rates as apply to American citizens with respect to income from United States They will, therefore, be subject to the increase in tax applicable to American citizens.

sources.

CORPORATIONS

(1) Domestic corporations.-Your committee increased the rate of tax on corporations by 1 percent. In view of the increase in the tax burden imposed upon individuals under the bill, it was believed that corporations should bear some part of the increased burden.

The rates under the proposed bill and under the existing law are as follows:

(2) Foreign corporations. Since the tax on domestic corporations is increased, your committee also deemed it advisable to make the same proportionate increase in the tax on foreign corporations deriving income from American sources. Under existing law, foreign corporations having an office or place of business in the United States are subject to a flat rate of 18 percent. This has been increased under the bill to 19 percent. Foreign corporations not engaged in trade or business within the United States or not having an office or place of business therein are taxable only upon their dividends, interest, or other fixed or determinable periodical or annual income, and they are subject to a tax of 15 percent on such income. In the case of dividends, the rate is 10 percent unless received by a corporation organized under the laws of a contiguous country, in which case the rate may by treaty be reduced to not less than 5 percent. The rate of 10 percent is increased to 15 percent and under the defense tax, to 161⁄2 percent. No increase in taxes will apply where its application will be contrary to any treaty of the United States.

TITLE II-TEMPORARY CHANGES

The bill makes certain temporary increases in the internal-revenue laws for a period of 5 years. These changes are briefly as follows:

(1) INCOME TAX

For taxable years beginning after December 31, 1939, and before. January 1, 1945, the tax computed in accordance with the changes made in title I of the bill is increased by 10 percent thereof. To prevent the rate in the higher brackets from being confiscatory, a cushion

is inserted which prevents such increase from being greater than 10 percent of the net income in excess of the tax computed under existing law, as amended by title I. This cushion begins to operate where the tax so computed is in excess of 50 percent of the net income, which in the case of a married person is around $200,000. The following examples will show the result of the operation of the tax and the cushion:

It will be seen from the above examples that in the case of a married man without dependents with $5,000 net income, the defense tax is determined by increasing the ordinary tax of $100 by 10 percent, or $10, making a total tax of $110. The cushion will not operate in this case because the ordinary tax is not in excess of 50 percent of the net income. In the case of a married man with $300,000 net income the 10 percent defense tax if applied without the cushion, would amount to $16,936.40, but since the ordinary tax is in excess of 50 percent of the net income the cushion applies. Accordingly, the defense tax in this last example is computed by applying the 10 percent against $130,636 (the amount of the net income less ordinary tax) instead of against the tax of $169,364. This makes the defense tax $13,063.60 instead of $16,936.40.

(2) EXCESS-PROFITS TAX

The amount of the excess-profits tax payable for any taxable year ending after June 30, 1940, and before July 1, 1945, is increased by 10 percent. Thus, a corporation with an excess-profits-tax year ending July 31, 1940, will be subject to the 10-percent increase. If the excess-profits tax payable is $1,000, the defense tax will be $100, and the corporation will pay a total excess-profits tax of $1,100.

(3) CAPITAL-STOCK TAX

The capital-stock tax is increased for the year ending June 30, 1940, and for the 4 succeeding years ending June 30, from $1 per thousand of adjusted declared value to $1.10 per thousand of adjusted declared value.

(4) ESTATE TAX

In the case of a decedent dying after the enactment of this bill and before the expiration of 5 years after such date, the estate tax payable (after application of the credits provided for State death taxes and Federal gift taxes), is increased by 10 percent.

(5) GIFT TAX

The gift tax is also increased by 10 percent, effective for the calendar year 1940 and subsequent calendar years up to and including the calendar year 1945.