Senator CONNALLY. Shotguns and rifles for sporting purposes? Mr. SULLIVAN. They are already taxed under the present law. Senator CONNALLY. We haven't any increase on those? Mr. SULLIVAN. No, sir. The CHAIRMAN. Mr. Secretary and Mr. Sullivan, will you please supply the committee, if you are not presently prepared to do so, with the estimated yield from the excise taxes for 1942? Mr. SULLIVAN. Yes, sir. The CHAIRMAN. Under existing law? Mr. SULLIVAN. Yes, sir. The CHAIRMAN. We will be glad to have that. And you will also, of course, have the estimated yield under this bill. Mr. SULLIVAN. Yes. The CHAIRMAN. I was particularly interested in getting the 1942 fiscal estimate under existing law and the yield from the excise taxes. Mr. SULLIVAN. I think it might be helpful to the committee, Mr. Chairman, if we prepared that chart in a form showing the anticipated yield under the present law, the additional yield under the proposed bill, and then the total in the third column. Mr. CHAIRMAN. Exactly. Mr. SULLIVAN. Provided this bill is enacted into the law. We will have that for you as soon as possible, sir. The CHAIRMAN. Would it be possible to have also a statement from the Treasury of the total number of corporations that would pay excess-profits taxes under the present law and indicating the percentage of the taxpaying corporations paying excess-profits taxes between the two classes, that is, those who take the earned income credit and those who take the invested capital credit? Mr. SULLIVAN. I can give that to you now if you like it, sir. The CHAIRMAN. When you come on the witness stand. Mr. SULLIVAN. I have that; yes, sir. The CHAIRMAN. You have that already? Mr. SULLIVAN. Yes. The CHAIRMAN. Now, Mr. Secretary, I believe there are no other questions. Senator CONNALLY. I want to ask him a little short question. Senator CONNALLY. Mr. Secretary, what is the present limit on the amount of earned income that you can deduct? Secretary MORGENTHAU. $14,000. Senator BARKLEY. May I ask, Mr. Sullivan, if he has prepared or can furnish the committee with a table or a list of a numerical estimate of the couples, husbands and wives, who would be included in the modification of the joint return suggestion that has been made by the Secretary? You said awhile ago that your revised figures would estimate about 170,000 families. Mr. SULLIVAN. About 215,000 families would file separate and community property returns under existing law. Senator BARKLEY. How many of them would be included in your earned income brackets as applying to both husband and wife? Mr. SULLIVAN. I will try and give you our best guess on that as soon as possible, Senator Barkley. Senator VANDENBERG. May I ask if there is any estimate available as to what this would produce if we were to follow this? Mr. SULLIVAN. We will have that for you; yes, sir. Senator BAILEY. Have you a table as to the consolidated return or the prohibition of the separate return of husband and wife, by States, as to how many people would be affected in each State? Mr. SULLIVAN. Yes. Senator BAILEY. That is in the House report? Mr. SULLIVAN. Yes, sir. That is already in. (See H. Rept. 1040, 77th Cong., 1st sess., p. 16.) The CHAIRMAN. Mr. Secretary, we thank you for your appearance before the committee. You desire Mr. Sullivan to come on next? Secretary MORGENTHAU. Thank you, Mr. Chairman, for the courtesy. I am available at any time. The CHAIRMAN. All right, Mr. Sullivan, you may proceed when you are ready. STATEMENT OF HON. JOHN L. SULLIVAN, ASSISTANT SECRETARY OF THE TREASURY The CHAIRMAN. Mr. Sullivan, you have a prepared statement? The CHAIRMAN. Do you wish to proceed with that until you finish before questions are asked? Mr. SULLIVAN. Whichever way is preferable to the committee. I think we might perhaps save a little time if I did finish, because in the statement I might eventually answer questions which might otherwise be asked. The CHAIRMAN. It probably would be more orderly if you finish your prepared statement first. As you say, it might answer some questions that would arise in the mind of someone. Mr. SULLIVAN. Mr. Chairman, and members of the committee: In his discussion of taxation as an essential part of national defense, Secretary Morgenthau emphasized the need for paying a large proportion of the defense costs from present taxes and the need for making full use of the potentialities of the tax system in resisting price inflation. In the final analysis, the job of defense is largely a production job. The tax system therefore, must be designed to enhance and not burden defense output. The job of defense is also one of national unity. This makes it imperative that as far as possible the huge tax burden necessitated by the emergency be apportioned among the various groups of our population equitably and without discrimination. The Secretary has laid before you the broad outlines of our tax problem. My statement will deal more directly with the provisions of the pending bill. In the Secretary's statement before the Ways and Means Committee he indicated a need for legislation to produce annually $3,500,000,000 additional revenue. This recommendation was based on the conclusion that current taxes should provide approximately twothirds of the Federal expenditures during the emergency period. In terms of the fiscal year 1942 revenues and expenditures indicated last April, $3,500,000,000 additional revenue would have met the two-thirds-one-third ratio of taxes to borrowing. In the past 3 months the fiscal situation has undergone further change. Expenditures for the fiscal year 1942 are now estimated at $22,169,000,000 rather than the $19,000,000,000 as of April 24. Receipts from the existing revenue system, without the pending bill, are estimated at $9,402,000,000. Thus, even with $3,500,000,000 additional revenue, the revenue system would still be $1,900,000,000 short of the two-thirds-one-third goal. This bill, H. R. 5417, is estimated to produce in a year of full operation $3,216,400,000 or $283,600,000 less than the amount recommended by the Secretary. Of this total, $864,800,000 or 26.9 percent of the additional revenues will be derived from increases in individual income taxes, $1,345,200,000 or 41.8 percent from increases in corporation taxes, $151,900,000 or 4.7 percent from increases in estate and gift taxes and $854,500,000 or 26.6 percent from new excise and increases in existing excises. With respect to the individual income tax, the provisions of the bill are confined principally to increases in the tax rates. The present rate of the normal individual income tax is unchanged, but the surtax rates are increased substantially. Moreover, the surtax under the revised schedule applies to the first dollar of surtax net income, whereas, under existing law the first $4,000 of surtax net income is free from surtax. The bill provides for increases in the surtax rather than in the normal tax, in order to place most of the additional tax burden on the recipients of interest from partially tax-exempt securities. The rate schedule under the bill differs in certain respects from that proposed to the Ways and Means Committee by the Treasury. The bill imposes a tax of 5 percent upon the first $2,000 of surtax net income and increases existing rates up to those applicable to $750,000. The Treasury recommended that the surtax start at 11 percent on the first $2,000 of surtax net income. Because of the importance of curbing the present inflationary tendency and because of the revenue it would produce, the Treasury repeats its recommendation. Senator BYRD. Could you give me the estimate of revenue that would be derived from that as compared to the 5 percent? Mr. SULLIVAN. Yes; under the original Treasury proposal for an individual income tax surtax schedule without mandatory joint returns, it yielded a little bit in excess of 1.5 billion dollars gross yield and 1.3 billions net after allowing for the increased corporation taxes. The surtax schedule that was enacted by the House, including the mandatory joint returns which accounted for about $300,000,000, I think totaled a net increase of about 1.2 billion dollars. Is that correct, Mr. O'Donnell? Mr. O'DONNELL. The additional net yield after allowing for the effect of increases in corporation taxes, of the individual income taxes at calendar year 1941 estimated levels of business is now estimated at $864,800,000 after the exclusion of the mandatory joint return provision which was contained in the original House bill. That provision was estimated to yield $287,200,000 net as compared with the $258,000,000 net which we estimate will be raised by the present Treasury proposal for a mandatory joint return provision. Mr. SULLIVAN. $864,800,000 without the mandatory joint return. Senator BYRD. If that was increased to 11 percent, as you recommended, how much additional would be raised as compared to the 5 percent? Mr. SULLIVAN. About $450,000,000. Senator CONNALLY. That is $436,000,000 is it not? Senator WALSH. That leaves out the joint returns? Senator WALSH. $450,000,000? Mr. SULLIVAN. Yes. The pending bill leaves the amount of the personal exemptions and the credit for dependents unchanged. The Revenue Act of 1940 decreased the exemptions from $1,000 to $800 for a single person and from $2,500 to $2,000 for a married couple. Approximately 8,200,000 new returns are expected to be filed in 1941, and it is estimated that there were approximately 4,000,000 new taxpayers. Although it leaves the personal exemptions unchanged, this bill will actually broaden the base. It makes the surtax applicable to the first dollar of income after the personal exemption and credit for dependents and since the earned income credit is allowed for normal tax but not for surtax purposes, some income not now subject to tax will be subject to the surtax. Under existing law the earned income credit permits a single person to be free of income tax unless his income is in excess of $888 while a married couple with no dependents is free of income tax unless it receives more than $2,222, although the personal exemptions in these instances are only $800 and $2,000 respectively. The result of the application of the surtax to the first dollar of surtax net income, as provided in the bill, is to make taxable approximately 2,470,000 people who otherwise would be free of tax with the same income. These, together with the persons who will become taxable as a result of increases in their income are expected to raise the number of 1942 income taxpayers 3,405,000 over the 1941 number. Senator VANDENBERG. And what does that make the total number of taxpayers? Mr. SULLIVAN. It is estimated, Senator Vandenburg, that if the pending bill is enacted, 17,107,000 individual income-tax returns will be filed during the calendar year 1942, and of this number 10,925,000 will be taxable. To complete the picture at this point, if you care to write these figures down, if the recommendations subsequently to be made in this statement are adopted, that will add to the 17,107,000 people filing income tax returns, another 4,900,000, so that there will be a grand total of 22,000,000 individual income-tax returns filed in 1942. Senator CONNALLY. Mr. Sullivan, let me ask you, the figures 10,000,000 who file returns and do not pay any tax Mr. SULLIVAN (interposing). The 10,000,000 are the ones who are taxable. Senator CONNALLY. 7,000,000 who will file returns will not pay any tax. Whom do you require to file a return now under this bill? Mr. SULLIVAN. The requirements are on gross income, rather than net income, you see. A person could have a gross income and the deductions may be such as not to require him to pay any tax. Senator CONNALLY. You mean, if he has a gross income of over $800 he has got to file a return whether he pays any tax or not? Mr. SULLIVAN. That is correct. Senator CONNALLY. That is what I am trying to get at. Mr. SULLIVAN. Even though there is a cost in our handling of the nontaxable returns, Senator Connally, it is not very great. It only averages about 50 cents per nontaxable return. We think it is well worth while to maintain a continuity of tax record on the individual, because if the next year he goes over and he has not filed, we look him up and we would get more than the 50 cents. Senator Connally. You would get more taxes from people who are now not filing any return at all, thinking they are not taxable? Mr. SULLIVAN. That is correct, sir. That is our anticipation. Senator VANDENBERG. Will you add one more figure at that point? You are going to have 22,000,000 returns under your proposal? Mr. SULLIVAN. Yes. Senator VANDENBERG. How many will be taxable? Mr. SULLIVAN. Well, under the pending bill, of the 17,107,000 we would anticipate that 10,925,000 would file taxable returns. Now, I estimate that if exemptions are lowered to $750 and $1,500 an additional 4,900,000 returns would be filed, of which 2,275,000 would be taxable. Senator VANDENBERG. In round numbers, you would have 13,000,000 returns? Mr. SULLIVAN. Just about. Senator LA FOLLETTE. While you are getting more money from the people in the upper brackets when you reduce the exemption? Mr. SULLIVAN. That is quite true. Senator LA FOLLETTE. That is where the real revenue actually comes from. Mr. SULLIVAN. Of the $303,000,000 we anticipate we will gain as the result of lowering the exemptions, the overwhelming portion comes from the people who today, last year, over the last few years have already been on the tax roll. When you lower the personal exemption for married people $500 as you did last year, one of the results of that is that the married person who is already paying a tax has $500 removed from his exemption and put on his income at the very top bracket. Senator VANDENBERG. There is not any doubt about that. I was just trying to find out how much you were broadening the base in terms of people. Mr. SULLIVAN. Yes. Senator CONNALLY. What would you say about reducing the married exemption to $1,500 but not taxing them as high as you would, say from $2,000 up, say 4 percent, 3 percent, do not you think we would get a good deal of money there? Mr. SULLIVAN. I think when we come to the tables you will see that the schedules that are now in the law are not at all too harsh on those people in the lowest brackets. Senator CONNALLY. I am talking about reducing the exemption from $2,000. Mr. SULLIVAN. I am going to recommend that they be reduced to $1,500 for married people and $750 for single people, and that the surtax rates apply on that basis, and we have the tables here to show just what they will have to pay in taxes. Senator VANDENBERG. The total bill passes far beyond the figures you and I have been talking about. For instance, the automobile use tax will reach around 32,000,000 people. Mr. SULLIVAN. It will if it is enacted. Senator VANDENBERG. That is what I mean. Certainly it will not, if it is not. Mr. SULLIVAN. I beg pardon? Senator VANDENBERG. Certainly it will not if it is not enacted. |