Who pays the taxes? 3 This is one of the most fundamental questions in the domain of modern taxation, though the answer to it cannot be given with precision in the absence of so much essential data. The general distribution of the tax burden for 1939 is painted in broad strokes in charts XVII and XVIII. These charts suggest that persons in the lowest income group, who receive less than $500 per year, compose 17 percent of all income groups in the Nation, but receive only 3.4 percent of the total income. They make no savings during the year but in fact run up substantial deficits. In spite of the meagerness of their income one-fifth of it is taken away by a variety of concealed consumers' taxes. At the other end of the income scale, persons with incomes of $20,000 and more are but 0.3 percent of all income recipients, yet receive 8.4 percent of all income. Though paying out 37.8 percent of their income in taxes, they accounted for 30.4 percent of all savings. The operation of the American tax system is regressive at the lowest level, proportionate at the middle levels ($1,000-$10,000) and progressive at the higher levels. Persons with incomes of between $5,000 and $10,000 pay a smaller percentage in taxes than does the lowest group with incomes under $500. These figures indicate that the existing tax system favors the income groups between $1,000 to $10,000 more than persons in the lowest income groups. Their net incomes are small enough to escape the harsher effects of the income tax and large enough to provide a surplus over their expenditures for taxable consumer goods. It is to be noted from the chart that proportionate taxes fall with much greater weight on limited incomes than on larger ones, where the capacity for making savings is considerable, and thus are inequitable. The income group of $20,000 and upward has been able to save nearly four-tenths of its income, which is equivalent to the sum of its direct and indirect taxes. The income group between $10,000 and $20,000 managed to save nearly a third of their entire income, in spite of a tax load of 25.5 percent on the $10,000-$15,000 group, and one of 31.7 percent on the $15,000-$20,000 group. The identical percentage saved by these two groups is particularly impressive because of the 25 percent difference in their respective tax loads. Regressive and proportionate taxes supply the great bulk of all tax revenues. Only 25 percent of all taxes are based on capacity to pay. The high proportion of regressive taxes, which fall most heavily on the lowest income groups, is the glaring inequality in the American tax system. State and local regressive taxes on specific consumption were a direct charge of 4.3 percent on all 1938 incomes below $500 but a mere 1.6 percent on incomes of $20,000 and upward. The disparity of this arrangement grows more striking if the presumption be made that all business costs are commonly shifted to the ultimate consumer. If that is the case, regressive taxes were a direct charge of 13.8 percent on all 1938 incomes below $500 and only 3.5 percent on incomes of $20,000 and more. Within the last decade the yield from regressive taxes has multiplied faster than that from progressive taxes with distressing results 3See Temporary National Economic Committee Monograph No. 3 by Gerhard Colm and Helen Tarasov. for persons in the lower income brackets. Progressive taxes in 1930 brought in 72.2 percent of all revenues, but decreased in 1938 to 54.6 percent; regressive taxes, on the other hand, increased from 14.2 percent in 1930 to 28.8 percent in 1938. In actual dollars progressive taxes yielded in 1938 an excess of $725,796,000 over its 1930 figure while regressive taxes yielded $1,183,808,000 more than in 1930. The growth of sales taxes has been a major manifestation of the trend toward increasingly regressive State tax systems. Sales taxes were first enacted as emergency revenue measures to finance the tremendous relief needs in the depression's depths, which had been accompanied by catastrophic declines in property and income tax receipts. A negligible factor in the revenues of 6 States in 1932, State sales taxes, spread to 27 States in 1937. Although the number of States levying sales taxes has since decreased to 22, higher rates, better enforcement, and the supplementary use tax have raised the aggregate annual revenue to $485,000,000. The trend has been levied, but not reverse. The "emergency" character of the tax is disappearing, but the defense program has renewed discussions of the revenue possibilities inherent in sales taxes. The imposition of use taxes and decisions making the tax applicable to all products used in the State penalize out-of-State competition. But the effect on business generally is less direct, depending in part on the elasticity of demand for the product, on general purchasing power, and the degree of retail competition-as well as the extent of enforcement. Even though the laws usually require that sales taxes be passed on to consumers, retailers are not always able to do so. As purchasing power contracts in the downward swing of the business cycle, the retailer may have to absorb his sales tax by cutting prices and profits. Regardless of the cycle, in a low-income community with rigidly limited cash available, the retailer may likewise have to absorb the sales tax, since the consumer can pay it only by decreasing his purchases and the retailer's volume. The retailer may find it advisable to conserve his volume by lowering his prices and unit margin. The regressiveness of sales taxes is sharpened far beyond its apparent extent by two characteristics of the laws as written-(a) the exemption of services, which account for a progressively larger proportion of the spending of higher income groups, and for almost none in the lowest income families; and (b) the rate schedules, which in fact favor the bigger consumers who can afford to buy in quantities to minimize their tax, while low-income consumers frequently must buy in driblets so that their tax, at a minimum of 1 cent, may be more than three times the prescribed legal rate. To counteract this undesirable feature food has been partially exempted, and tokens or punch cards have been introduced in some States to cover fractional purchases at a proper proportionate rate. But no exception can do more than ameliorate the regressiveness inherent in any levy based on spending rather than income. It should be noted that property owners, in whose behalf sales taxes have been extended, suffer from sales taxes in inverse ratio to the productivity of the property. The poorer the property, the lower is its owner's income (assuming he has no other income), and the more he overpays in sales taxes. Nor is the farmer an exception, as farmers |