Table 6Federal Excise Tax Rates on Selected Items a

As of December 31, Selected Years 1913-196 3

1913

1919

1925

1932

1944

1952

1954

1963

(Dollars, except where percentages are indicated )Liquor taxes

Distilled spirits (per proof or wine gallon) 1 .10 2.20 1.10 1 .10 9.00 10.50 10.50 10.50Wines cordials, etc .

(per proof or winegallon) - .16-2.20 .041.10 .04-1 .10 .15-9.00 .17-10.50 .17-10.50 .17-10.50

Fermented malt liquors (per barrel) 1 6 6 6 8 9 9 9

Tobacco taxesCigars, large (per thousand) 3 4-15 2-13.50 2-13.50 2.50-20 2.50-20 2.50-20 2.50-20Cigarettes (per thousand) (3 lbs. or less and

more than 3 lbs . respectively) 1 .25, 3 .60 3, 7.20 3, 7.20 3, 7.20 3.50, 8.40 4, 8.40 4, 8.40 4, 8.40Tobacco and snuff (per pound) .08 .18 .18 .18 .18 .10 .10 .10

Documentary, etc., stamp taxesConveyances (per $500, or additional frac -

tion, if value is over $100) - .50 - .50 .55 .55 .55 .55Issuance of bonds and capital stockb (per

$100) - .05 .05 .10 .11 .11 .11 .11 ' .1 0Issuance of stock without par or face value ,

and actual value under $100 (per share1919; per $20 thereafter) - .05 .01 .02 .03 .03 .03 (b )

Transfer of bonc ;s ; capital stock (per $100or fraction or per share, respectively) - -, .02 -, .02 .04, .05 .05, .06 .05, .06 .05, .06 .05, M

Silver bullion sales or transfers (profits) - - - - 50% 50% 50% -Playing cards (per package of not more tha n

54) .02 .08 .10 .10 .13 .13 .13 .13

Manufacturers' excise taxesLubricating oils (per gallon) - - - .04 .06 .06 .06 .06Matches, white, phosphorous (per hundred) . .02 .02 .02 .02 .02 .02 .02 .02Matches, in general (per thousand) - - - .02 .02 .02 .02 .02Gasoline (per gallon) - - - .01 .015 .02 .02 .04

N

Electrical energy (sale price) - - - 3% 3%% - - -w -

Table 6 (Continued)

Federal Excise Tax Rates on Selected Items a

As of December 31, Selected Years 1913-196 3

1913

1919

1929

1932

1544

1952

1954

1963

Manufacturers excise taxes—(continued) (Dollars, except where percentages are indicated )Tires and inner tubes (sale price, 1919-1924 ;

per pound, respectively, 1932-1955) —

5% —

.0225, .04 .05, .09 .05, .09 .05, .09 .1 0

Tread rubber (per pound) —

— —

— — — — .05

Automobile trucks (sale price) —

3% —

2% 5% 8% 8% 10%

Automobiles (sale price) —

5% —

3% 7% 10% 10% 10%

Automobile accessories (sale price) —

5% —

2% 5% 8% 8% 8%

Radios and accessories (sale price) —

— —

5% 10% 10% 10% 10%

Refrigerators (mechanical household)5% 10% 10% 5% 5%(sale price) —

— —Firearms, shells, cartridges (sale price) —

10% —

10% 11`0 11% 11% 11%

Pistols and revolvers (sale price) —

10% 10%

10% 11% 11% 10% 10%

Sporting goods (sale price) —

10% —

10% 10% 15% 10% 10%

Musical instruments and phonographs5% — 10% 10% 10% 10%(sale price) — —

Records (sale price) —

5% —

5% 10% 10% 10% 10%

Electric, gas, and oil appliances (sale price) —

— —

— 10% 10% 5% 5%

Business and store machines (sale price) —

— —

— 10% 10% 10% 10%

Cameras and photographic apparatus10% 10%— 25% 20% 10% 10%(sale price) —

Photographic film (sale price) —

5% —

— 15% 20% 10% 10%

Mixed flour (per barrel containing 99-196 lbs .) .04

.04 .04

.04 — — — —Automatic slot vending and vending weighing

machines (sale price, respectively) —

5%,10% —

— — — — —Candy (sale price) —

5% —

2% — — — —

NU

Table 6 (Continued)

Federal Excise Tax Rates on Selected Items a

As of December 31, Selected Years 1913-196 3

1913

1918

1946

1932

1944

1862

1864

1963

(Dollars, except where percentages are indicated )Miscellaneous excise taxes

General telephone service (amt paid) — — —

— 15% 15% 10% 10%Toll telephone service (amt paid; prior to

1944, per message) — .05-.10 —

.10-.20 25% 25% 10% 10%Cable and radio messages, domestic (am t

paid; prior to 1944, per message) — .10 —

.10 25% 15% 10% 10%Telegraph

messages,

domestic

(amt

paid ;1919 per message) — .10 —

5% 25% 15% 10% i0%Leased wires, or teletypewriter and wire mile -

age service (amt paid) — 10% —

5% 25% 25% 10% 10%Wire and equipment service (ain't paid) — — —

— 8% 8% 8% 8%Transportation of oil by pipe line (amt paid)

— 8% —

4% 4%% 4%% 4%% —Bowling alleys, pool tables (per unit, per year)

— 10 —

— 20 20 20 20Transportation of persons (amt paid) — 8% —

— 15% 15% 10% 5%dTransportation of property (amt paid) — 3% —

— 3% 3% 3% —U:;e tax on highway vehicles weighing ove r

26,000 lbs. (per 1000 lbs . per year) — — —

— — — — 3Lease of safe deposit boxes (amt collected)

— — —

10% 20% 20% 10% 10%Admissions (for every 104t or fraction, 1919-

1939; 54 or major fraction, 19441951 ; 10.1955; first

1 exempt 1958

— .01 .01

.01 .02 .02 .01 .01Leases of boxes or seats (amt for which sim -

ilar accommodations are sold) — 10% 10%

10% 20% 20% 10% 10%Cabarets, ra3f gardens, etc. (for every 10,( or

fraction of 20% of total charge, 1919-1939;amount paid, 1944-1963) — .015 .015

.015 20% 20% 20% 10%

Table 6 (Continued)Federal Excise Tax Rates on Selected Items a

As of December 31, Selected Years 1913-196 3

1913

1919

1928

1932

1952

1954

1963

(Dollars, except where percentages are indicated )

Dues and initiation fees (am't paid) — 10% 10% 10% 20% 20% 20% 20%

Oleomargarine (uncolored, colored respec -tively, per pound; domestic) 0025, .10 .0025, .10 .0025, .10 .0025, .10 .0025, .10 — — —

Processed and adultered butter(respectively, per pound) 0025, .10 .0025, .10 .0025, .10 .0025, .10 .0025, .10 .0025, .10 .0025, .10 .0025, .10

Filled cheese, domestic and importe d(respectively, per pound, in addition to im-port duties) 01, .O8 .01, .08 .01, .08 .01 ' .08 .01 ' .08 .01, .08 .01_08 .01 ' .08

Use of beats (per foot, according to size ,1919, 1924; per boat according to size o rtype, 1932; length, 1944) — 1-4 — 10-200 5-200 — — —

Coin-operated amusement and gamblingdevices (per unit, per year, respectively) — — — — 10, 100 10, 250 10,250 10,250

Retailers' excise taxesJewelry (sale price) — 5% — ( e ) 20% 20% 10% 10%

Furs (sale price) — (e ) — ( e ) 20% 20% 10% 10%

Toilet preparations !per 25¢ or fraction, 1919 ;sale price thereafter) — .01 — ( e ) 20% 20% 10% 10%

Luggage (sale price) — 10% — — 20% 20% 10% 10%

a. In addition to the rates given, several of the categories are also subject to special taxes on manufacturers, processors or dealers ; for further details and definition oftaxable commodities, exemptions, etc ., see Annual Report of the Secretary of the Treasury for 1940 and 1950, and Federal Excise Tax Data, March, 1964, prepared b ythe Staff of the Joint Committee on Internal Revenue Taxation .

b. Based on par value or actual value in the case of no par value before 12/31/58 ; thereafter tax on all stock issues based on actual value ($ .10 per $100) .G Stock transfers, 4 cents per $100 of actual value ; minimum tax, 4 cents per share, maximum tax. 8 cents per share -d. Tax on air travel only. Tax on other passenger transportation repealed as of 11/16/62 .e. Tax levied at manufacturers level (10% in 1932) .Source Treasury Departrnent.

tobacco, passenger cars, and gasolin ewere raised to a new high .

Among other changes were the follow-ing : the tax on household appliances wa sextended to 16 new items, while 19 item sof a type used mainly by children wer eremoved from the base of the tax o nsporting goods . The tax on electrical en-ergy was repealed, while taxes were ap-plied to diesel fuel for highway vehicles ,fountain pens, mechanical pencils, ciga rand cigarette lighters . Commodities usedfor business purposes were eliminatedfrom the base of some of the manufac-turers' excise taxes . The tax on admis-sions was removed in cases where al lproceeds inure to religious, charitable ,and educational organizations . A tax wasimposed on wagers and an occupationaltax on persons accepting wagers .

The excise tax increases imposed dur-ing the Korean War were originally sched-uled to expire April 1, 1954 . The ExciseTax Reduction Act of 1954, however,postponed for one year the reduction swhich were scheduled in the taxes o nliquor, tobacco, automobiles and motorfuels, and instead reduced to 10 percentcertain excise tax rates which had pre-viously been higher. These reductions

were mainly in the retailers' excises o nfurs, jewelry, luggage, and toilet prepara-tions, in various manufacturers' excises ,and in the taxes on communications,transportation of persons, and admissions .

Because of the pressure of rising ex-penditures and the priority given to in -come tax reduction, the scheduled excisetax reductions have been postponed for1 1 successive years .

In 1956 and 1957 the Committee o nWays and Means again held extensiv ehearings on excise taxes, but dealingchiefly with technical problems rathe rthan tax policy. The resu'.ting Excise TaxTechnical Changes Act of 1958 removednumerous minor inequities in the opera-tion of excise tax laws and also mad ecertain tax reductions and minor in-creases .

In 1964 the Committee on Ways an dMeans tackled basic questions of excis etax structure and policy . Hearings per-mi-,ed academic economists and industryrepresentatives to present their views. Inthe Federal Budget for 1966, the Presi-dent proposed a $1 .75 billion excise ta xreduction, but without giving details o fproposed changes .

THE PRESENT EXCISE TAX STRUCTUR E

The present excise tax system consist sof more than 50 different taxes yieldin gabout $14%7 billion . Liquor and tobaccotaxes produce nearly $6 billion. Taxeson transportation produce another $6 bil-lion. Retailers' excises produce abou t$500 million . All other taxes produceabout $2Y2 billion (Table 7) .

Liquor and Tobacco Taxex

With the exception of the prohibitionera, liquor taxes have been a permanen tand important part of the Federal ta xsystem since 1862 . In 1913 liquor andtobacco taxes provided nearly half o ftotal Federal tax collections . In 1964 the yproduced only five perc, :nt of the total .

These taxes are levied at widely differ -

ent rates. The tax on distilled spirits rep-resents nearly half of the retail price . Thetaxes on wines vary from less than 4percent to 15 percent of the retail price ,depending on alcoholic content . The taxon beer is about 15 percent of the retai lprice. The tax on cigarettes is about 3 0percent, while that on cigars is less tha n10 percent .

Rates of these taxes were not reducedafter World War II . During the KoreanWar they were increased, and subse-quently reductions have been postponed .Since 1952 the tax on distilled spirits hasbeen 17 percent higher, and that o ncigarettes 14 percent higher, than the peaklevels of World War II .

These taxes, however, are "specific "

27

Table 7Federal Excise Tax Collections by Type of Tax, Net of Refunds•

Fiscal Years 1864 . 1866b(Amounts in Millions)

Percentage distributio ntea1064

1965

19"

trust hinds truxst fuind6

Total $13,730 $14,372 $13,729 100.0 -Trust fund taxes 3,519 3,639 3,959 25.6 -Total, administrative budget 10,211 10,733 9,770 74.4 100 . 0

Liquor and tobacco 5,549 5,794 5,954 40.4 54.3Alcoholic beverages 3,501 3,669 3,801 25.5 34 . 3Tobacco 2,048 2,125 2,153 14.9 20. 1

Taxes on transportation 5,676 5,854 6,378 41 .3 -Highway trust fund taxes 3,519 3,639 3,959 25.6 -

Gasoline 2,514 2,595 2,670 18.3 -Tires, inner tubes, and tread

rubber 413 425 445 3.0 -Trucks, buses, and trailers 357 376 389 2.6 -Use tax on certain vehicles 106 103 105 .8 -Diesel fuel used on

highways 128 140 150 .9 -Proposed increase - - 200 - -

Other taxes on transportation 2,157 2,215 2,419 15.7 21 . 1Passenger automobiles 1,746 1,775 1,825 12.7 17 . 1Parts and accessories fo r

automobiles 229 237 242 1.7 2 . 2Lubricating oils 76 77 78 .6 . 7Air t ransportation, persons 106 122 140 .8 1 .0Air transportation, freigat - - 4 - -

Fuels used on inland waterways - - 7 -- -Jet and other fuels - 4 123 - -

Taxes on communications 911 1,040 1,105 6.6 8.9Toll telephone service, tele- k.8 3 .7

graph, etc 380 440 475General telephone service 531 600 630 3.9 5 .2

Taxes on various household good sand services includin grecreation 1,191 1,287 1,376 8.7 11 .7Retailers excise taxes 475 515 549 3 .5 4.7

Furs 30 31 32 .2 .3Jewelry 189 205 215 1 .4 1 .9Toilet preparations 177 197 215 1 .3 1 .7L , iggage 79 82 87 .6 .8

2 8

Table 7 (Continued )Federal Excise Tax Collections by Type of Tax, Net of Refunds &

Fiscal Years 1904 . 1966b

(Amounts in Millions )

Percentage distributio n1964

Includin` Excludln`trust funds1964 1969 1966 trust funds

Manufacturers excise taxes . . . . $517 $560 $600 3.8 5. 1Electric, gas, and oil appli -

ances 78 81 85 .6 .8Electric light bulbs 42 44 47 .3 .4Radio and television set ,

phonographs, records ,and musical instruments 244 266 287 1 .8 2 . 4

Refrigerators, quick-freezeunits, and self-containedair conditioning units . . . . 63 68 72 .5 .6

Photographic equipment . . . . 30 35 38 .2 .3Sporting goods, firearms ,

fishing rods, pistols, etc . 47 52 56 .3 . 5Fountain and ballpoin t

pens, etc 9 10 11 .1 . 1Matches 4 4 4 (d) (d)

Miscellaneous excise taxes 199 212 227 1 .4 1 . 9Admissions to theatres,

concerts, cabarets, etc . . . 88 95 102 .6 . 9Club dues and initiation

fees 75 80 85 .5 . 7Coin-operated amusemen t

and gaming devices 23 23 24 .2 .2Bowling alleys, pool tables 6 6 7 (d) . 1Leases of safe deposit boxes 7 8 9 .1 . 1

Regulatory, business and othertaxes 405 397 416 2.9 4 .0Wagering, including occupa -

tional taxes 6 7 7~ (c) . 1Documentary and stamp taxes 172 185 201 1 .3 1 . 7Business and store machines 72 74 77 .5 . 7Sugar tax 95 95 95 .7 .9Undistributed 60 36 36 .4 .6

a. Excise tax refunds are not entirely segregable by source . Refunds are available for the gasoline tax an dalcohol and tobacco taxes- for the purpose of this table, the small remainder of refunds was deductedfrom "undistributed" receipts .

b. Date for 1965 and 1966 as estimated or proposed in The Budget of the United States Government for th eFiscal Year Ending June 30, 1966 .c. After proposed reduction of $1 .5 billion In excise taxes .d. Less than .05 percent .Source : Bureau of the Budget and Treasury Department .

29

rather than "ad valorem" taxes, i .e., theyare levied at a flat rate on physical units .As a result inflation tends to reduce th erate of the tax as a percentage of theprice paid by the consumer .

Taxes on TransportationTaxes on transportation fall into tw o

groups : those on gasoline, tires and tubes ,trucks, buses, and trailers, proceeds ofwhich go into the highway trust fund andare generally called "user taxes"; othertaxes on transportation, such as the taxon automobiles, parts and accessories ,lubricating oils, and transportation of per -sons by air, go to the general fund . Thegeneral fund taxes on transportation pro-duce about 21 percent of excise tax rev-enue in the administrative budget . Alltaxes on transportation produce about 4 1percent of total excise tax revenue .

In governmental provision of trans-poration services, "user tax" financin ghas been considered appropriate. Usertaxes, charges, or fees, are an attempt ,albeit crudely, to apply the pricing sys-tem to certain government services . A taxor charge is levied that bears some re-lation to the cost of providing services;the people who use the service pay thetax or the charge in some relation to use .The public services concerned, however ,generally involve some benefits or cost sto people who do not directly use th eservices. Consequently, an exact appli-cat :on of the user tax principle is difficult .

The major source of revenue amongthe highway user taxes is, of course, th etax on gasoline . The successive increase sin the gas tax rate are evidence of th egrowing needs and pressures for highwa yexpenditures. The tax was 10 per gallonin thL 1930's, l 1h ¢ from 1940 to 1950 ,20 from 1950 to 1956, 30 from 1957-1959, and 40 since 1960 .

The Highway Act of 1956, which es-tablished the Highway Trust Fund t ofinance the new highway aid program, in -

creased existing highway user taxes an dimposed two new taxes—those on trea drubber and heavy highway vehicles .

Among other transportation taxes, themajor source of revenue is the manu-facturers excise tax on passenger cars .As a commodity of widespread use an dalso one on which expenditure rise smore than in proportion to income overpart of the income size range (Table 8) ,autos have been a source of substantia lrevenue . The excise taxes on passenge rcars, parts and accessories produce about$2 billion annually .

It is argued that the tax on passengercars is a discriminatory tax on a particu-lar kind of transportation which for manyis a necessity . It is also emphasized thatthe present rate of 10 percent is still a tthe Korean War level which was designe din part as a check on consumption .

The tax on cars represents a substan-tial item of business expense . Accordingto estimates of the U .S . Department ofCommerce, automobiles and parts sol das "producers durable equipment" (a scontrasted with personal consumption )amounted to about 17 percent of totalU .S. auto production in 1963 . 3

The taxes on transportation of propert ywere repealed in 1958, and that on trans-portation of persons (except by air) ex-pired in 1962 .

Tars on Communication sThe taxes on telephone services, tele-

graph, cable meEsages, wire services, etc . ,now produce about $1 billion annually .About half of this is paid by businesse sand about half by private consumers . '

The taxes on telephone and telegraphservices, ',nsofar as they fall initially o nbusiness concerns, discriminate againstthose businesses which use a relativelylarge amount of such services . They alsoprovide an inducement for companies toprovide their own communications serv -

1 Sure o/ Current Business, July 1964, p . 38 .4 . The Treasury Department has estimated that in 1%2 its much as 47 percent of the telephone excise tax wa s

derived from business calls . This includes both local and long-distance calls . (Executive Hearings before theCommittee on Ways and Means, House of Representatives . 88th Congress, 2d . session . Temporary Increase i nDebt Ceiling and Extension of Certain Excise Tac Rates, May 25, and 26, 1964, p . 51 . )

30

ices rather than use the "common car-rier . "

As shown in Table 10 below, thesetaxes put a relatively heavy burden o nlow income groups .

Taxes on Miscellaneous Goods and Service s

Retailers excises and miscellaneous ex-cises now produce $1 .3 billion, or 9 per-cent of excise tax revenue . The retailersexcises on furs, toilet preparations, jew-elry, and luggage account for nearly halfof this total. The remainder consists o fmanufacturers' excises on selected good sfor household and recreational use an dtaxes on a few selected services .

These miscellaneous taxes fall prepon-derantly on items of almost universalhousehold use . As wartime taxes they mayhave been useful as sources of revenueand as a means of checking nondefens eproduction. Today they appear to havemuch less justification in terms of equityor economic effect .

The strictly regulatory taxes, such a sthose on narcotics, naturally produce ver ylittle revenue. A few other taxes, no treadily classifiable under any logical eco-nomic category, do produce a consider-able amount of revenue .

The tax on business and store ma -chines, like that on communications serv-ices, is a rather arbitrary imposition o nselected business costs .

Characteristics o/ the Present ExciseTax System

The present excise tax system has sev-eral well recognized characteristics . Thefirst is that rates vary substantially as apercentage of retail price—from 40 per -cent in the case of distilled spirits to 4percent for some manufacturers' excises .Weighting these rates by the relative im-portance of the base gives an averagerate on the order of 12 percent . Exclud-ing liquor and tobacco, the average rateis about 8 percent of retail price includ-ing tax .

The second, and perhaps more signifi-

cant characteristic, is that selected item sonly are ta.ted . Such selectivity mean sthat many closely competing goods andservices are left untaxed . Table 9 list sexamples of the numerous cases of closel ycompeting products some of which ar etaxable while others are not . When onecommodity is subject to a tax of 10 per -cent or more, while competing commodi-ties or services are exempt, discrimina-tion is serious .

The third characteristic is that the se-lected items represent about one-fifth o ftotal personal consumption expenditures .The selective taxation of items result sin a much less regressive distribution ofthe excise tax burden than would be th ecase with a general excise tax . Table 8shows the marked difference in the pat -tern of expenditures subject to tax in re-lation to income as compared with thepattern of total consumer expenditures .Total consumption expenditures of ur-ban families (on the basis of the Bureauof Labor Statistics Survey of Consume rExpenditures 1960-61) fall from we!l ove r100 percent of income at the lowest in-come levels to 53 percent of income inthe $15,000 and over income class (in -come classes refer to money income afterpersunal taxes) . On the other hand, ex-penditures wholly or nartially subject toFederal excise taxes amounted to 22 per-cent of the income of families in the$1,000 to $2,000 income class, rose toabout 29 percent for families at middleincome levels, and fell to 16 percent o fincome for families in the $15,000 andover income class . In other words, theitems subject to Federal excise taxes gen-erally are relatively much less importantin the budgets of low income familie sthan items not subject to Federal excises .

Table 8 does not show the large vari-ation in expenditure patterns that existamong families in the same income class .Heavy consumers of tobacco and alcoholicbeverages, for example, have large excis etax burdens as compared with light con-sumers of these products or teetotalers .The present excise tax system also lead s

31

wNTable 8

Family Expenditure by Type as a Percent of Family Income a

By Money Income Class1960-1961

Money income class (Income after personal taxes )

$1,000

$2,000

$3,000 $4.000 $5.000 $4.000 $7.500 $10,000 $15.000All

Under

to

to

to

to

to

to

to

to

and

classes $1,000

1 .999

2,999

3,999 4,999 5.999 7,499

9.999 14.999

over

Total current consumption expenditures Expenditures wholly or partially subject to

Federal excisesTransportation

Automobileb

Other travel and transportationHousing furnishings and equipmentPersonal care and recreationTobaccoAlcoholic beveragesTelephone and telegraph

Expenditures not subject to excise taxescFoodHousing, household operations, fuel, light ,

refrigeration and waterMedical careEducation and reading Clothing, clothing materials, services Other expenditures

81 189 115 102 99 91 86 83 77 72 53

26 32 22 24 29 29 28 27 26 24 1 612 9 6 9 13 14 13 13 12 12 810 4 4 7 11 13 12 11 11 10 6

2 5 2 2 2 1 1 2 1 2 24 6 4 4 5 4 5 5 4 4 36 9 6 6 6 6 6 6 6 5 41 3 2 2 2 2 2 2 ? 1 11 1 1 1 2 1 1 '_ 1 1 11 4 3 2 2 2 1 1 1 1 1

55 157 93 78 69 62 58 55 51 47 3620 53 34 29 26 23 22 20 18 16 10

18 67 38 29 25 21 20 18 16 14 125 18 9 8 7 6 6 5 5 4 32 5 2 1 1 1 1 2 2 2 18 9 7 8 9 9 9 9 9 8 62 6 3 2 2 2 1 2 2 2 3

a. Expenditures are expressed as a percentage of money income before taxes Data based on reports for 66 metropolitan and other selected urban places to represen tthe entire urban United States . Details will not necessarily add to totals due to rounding ."Families" include single individuals who are separate consumer units .

b. Expenditures for new or used cars net of trade-in allowances.c. These expenditures are subject indirectly to excises that are levied on business services, e g . telephone services„ automobiles used for business purposes .Source: Buraw of Labor Statistics. Survey of consumer Expenditures . 19110.61 .

Table 9Selected Taxable and Non-Taxable Commoditie s

Under Federal Excise Taxes1964

Taxable Non-taxabl e

Mechanical pencils Lead pencil sFountain pens Pen holders and pen point sBadminton equipment, tennis, golf Baseballs and baseball equipmentPolo equipment Water polo equipmen tCold cream Shaving creamElectric blankets Electric heating-padsElectric diswashers Electric washing machine sElectric and gas clothes driers Vacuum cleanersFur coats Woolen and imitation fur coat sAutomobile tires Tires on lawnmowers, etc .Electric irons Electric shaver sAir conditioners Industrial fansAutomobiles House trailer sLipstick Nylon stocking sShampoos for tinting, etc . Shampoos (for cleansing purposes only )Rouge Powder puffsBeer Soft drinksBrooches ButtonsMuskrat scarf Squirrel trimmed cloth rn~,t sCigarettes, tobacco Smokers ' pipesLorgnettes Eyeglass framesPermanent waving solution Bobby pinsPhonographs Tape recordersBusiness and store machines Electronic computersAviat i on gasoline Jet fuels

Sources Treasury Department and Commerce Clearing House .

to significant differences in the tax burdenfor families of different sizes ." Such in-equities, however, are probably inevitabl econsequences of levying any type of ex-cise taxes. Given substantial differencesin spending patterns among families how-ever classified, there is bound to be a narbitrary element in the use of excisetaxes. It should be noted, however, thatthe income tax does not fall equally onall families with similar incomes (usinga broad definition of income) .

Excise taxes involve an "excess-burden"

for any given individual or family (exces sas compared with a comprehensive per-sonal income tax) in that the taxpaye rnot only gives up some real income t ogovernment as under the income tax, bu talso finds his choice of purchases affected—he tends to buy less of heavily taxedgoods and relatively more of nontaxeditems ending up with a less satisfactoryset of purchases than if his choice wereunaffected by a tax ."

In short, the present excise tax syste mis one that contains a good deal of varia -

5. Reed R Hansen "An Empirical Analysis of the Retail Sales Tax with Policy Recommendations, " National TaxJournal, March 1%2, pp . 1-13 .

6. An elaboration of this point can be found in George E . Break, "Allocation and Excess Burden Effects o nExcise and 4ales Taxes," Excise Tax Compendium ., Compendium of Papers on Excise Tax Structures submittedto the Committee on Ways and Means, U .S . House of Representatives, in connection with panel discussions o nthe same subjects, June 15 and 16, 1964, Part 1, pp, 65-72 .

33

tion in rates, some of which can be justi-fied on reasonable grounds, a substantia lamount of arbitrary discrimination be-

tween taxable and nontaxable items, an dconsiderable variation in burden on con-sumers depending on consumption habits .

THE ROLE OF EXCISES IN THE FEDERAL TAX SYSTE M

Excises have obviously played an im-portant part in the Federal tax system—providing a major portion of revenuesbefore the introduction of the incometax, and a substantial amount today alongwith individual income, corporation in-come, and estate and gift taxes . Exciseshave played special wartime roles inchecking inflation and in helping to di-vert resources from less essential to mor eessential uses . Excises also served to avoidfurther reliance on income taxes whe nincome taxes were raised to wartime peak sthat seriously affected the monetary re -wards for additional production .

In peacetime, excises can serve severa lpurposes :

1. They can and do provide substantia lamounts of revenue.

2. Liquor and tobacco taxes will undoubt-edly continue to play a "sumptuaryrole"—taxing a form of consumptio nwhich most people apparently believeshould be restricted below the level sthat would be reached without the tax .

3. Excises play a special role wherethere is some relationship between taxespaid and benefits received under ex-penditure programs .

4. Some excises, such as the taxes on nar-cotics and wagering, are regulator ytaxes .

5. Excises provide an alternative to high-er income taxes. The choice between ,or the "mix" of, excises and incometaxes, depends mainly upon assess-ments of (a) the distribution of theburden, (b) effects on the allocationof resources, (c) effects on the stabilit yof the economy, (d) effects on invest-ment and the rate of economic growth.In addition there are other considera-tions such as taxing consumption fro mreceipts not subject to income tax, rela-

tive costs of administration and tax-payer compliance, and intergovernmen-tal relations.

Revenue Prioducerx

Excise taxes provided 11 .4 percent ofFederal budget receipts in the fisca'. year1964 . Including trust funds, they pro-vided about 12 percent of all receipt sfrom the public .

Breaking down total excise tax revenueroughly in line with the roles listed above ,we have the following yields for 1964 :

Billions"Sumptuary " taxes

(liquor and tobacco)

$ 5 .5Highway user taxes

3 . 5Other taxes on transportation

2 .2Regulatory taxes

. 1Other taxes

2 .4

Total

$13 .7

While the *wlicy problem of 1965 ma ybe what kind of excise tax reduction ismost appropriate, the longer run ques-tion concerns the proportions of incom eversus non-income taxes in the Federalsystem. A large shift away from non-income taxation would reduce the scopefor further reduction of income tax rates .

Sumptuary Taxes

The role of checking consumption isnot entirely consistent with the role ofproducing revenue . The better revenueproducer a tax is, the less it can serve asa means of checking consumption . How-ever, as long as the demand for the com-modity or service taxed is not so elasti cthat a higher rate actually produces les srevenue, both revenue and sumptuarypurposes are achieved in some degree .

l/ xer Taxes

The user taxes of greatest importanc eare obviously the highway user taxes .

34

They now produce about $3 1/2 billion peryear. The decision to finance the Federa lhighway aid program with earmarke dhighway user taxes was made in 1956and no substantial change appears likelyin the foreseeable future .

Rapidly rising Federal expenditures fo rair and water transportation provide justi-fication for taxes on transportation o fpersons and property by these means .Total budget expenditures for air andwater transportation were $556 million i n1954 and are estimated at $1 .6 billion fo rthe fiscal year 1966 . Increases have bee nmarked in air navigation facilities, regu-lation and promotion of air travel, an din merchant marine subsidies . In his bud-get message in January 1965, the Presi-dent recommended continuation or enact-ment of various user charges as follows :

(1) Make permanent the 5 percent taxon air passenger transportation .

(2) Tax transportation of air freight a t2 percent .

(3) Tax fuels in general aviation at 4cents per gallon .

(4) Tax fuels in commercial aviation a t2 cents per gallon .

(5) Tax fuels used on inland waterway sat 2 cents per gallon .

(6) Increase certain user charges, chiefl yPatent Office fees .

These user tax proposals, if adopted,would mean additional general fund rev-enue of about $268 million in a full year .

Regulatory Taxe sA number of excise taxes are levie d

as a means of checking crime or enforc-ing the collection of other taxes . Thetaxes on narcotics and wagering are pri-marily designed to assist law enforcement ,Various license or occupational taxes area means of ensuring collection of excise son goods and services, such as sale o ffirearms and alcoholic beverages .

Other taxes with non-revenue purposes

include the taxes on the manufacture ofsugar, state bank note circulation, cottonfutures, and the "interest-equalizationtax" (which is designed to check theoutflow of long-term capital to othe rcountries) .Excises as an Alternative to Inct►me Taxe s

In the past, discussions of excises usual-ly emphasized the distribution of th eburden of these taxes. The major issueappeared to be the degree of regressivit yor progressivity involved. More recently ,somewhat less importance leas bee nattached to this issue, and more attentio nhas been given to the economic effects o fexcises . , Current discussions emphasizeexcise tax reduction as a stimulative de -vice . However, the basic case for excisetax reduction must be reform of the pres-ent system inherited for the most par tfrom wartime periods . The permanen troles assigned to excises in the Federa ltax system depend largely on an analysi sof the economic effects of exises com-pared with those of income taxes .

Distribution of the Burden . In the cas eof excise taxes of general application (i .e . ,covering capital as well as consumptio ngoods) it has been shown, as indicated i nSection II, that the effect is mainly toreduce money incomes going to "th efactors of production ." The effects of sucha tax, assuming full employment, are no tto raise consumer prices (which could no toccur without monetary inflation) bu trather to reduce the prices paid for th efactors of production—labor and capital .

A truly general excise or sales tax ,however, is strictly a theoretical concept .Existing excises are really partial taxe sapplying to only a portion of consume rexpenditures . In such cases it cannot beassumed that the only effects are to raisethe prices of the items taxed . This conclu-sion would still imply that the impositio nof excises, or the shift of a portion of th etax burden from income to excise taxes ,would raise aggregate demand and th emoney supply . Without an increase in ag-

7 . See Committee on Ways and Means, U .5 . House of Representatives, Excise Tux Compendium, Part I, June1964 .

35

wTable 1 0

Estimates! Federal Excise Tax Burden on Urban Families and Individuals by Income Classa(Estimated tax as a percentage of money income and "disposable receipts"b)

1960-196 1

Money income class (Income after personal taxes)$1 .000

$2,000

$3,000

$4,000

$5,000

$6,000

$7.500 $10,000 $15 .000All

Under

to

to

to

to

to

to

to to andclasses

$1,000

1 .999

2,999

3 .999

4.999

51999

7.499

9.999 14,999 overt

Estimated taxes as a percentage of money income before taxe sTotal Federal excise taxes 3 48

4.67

3.24

3.51

4.17

4.08

3.83

3.71

3.42 3.17 2.30Taxes on :

Alcoholic beverages 93

.90

.90

.87

1 .04

1 .03

.94

.98

.92 .93 .67Tobacco 57

1 .22

.84

.87

.85

.76

.69

.63

.53 .37 .2 1Telephone and telegraghd 24

.67

.43

.33

.31

.27

.26

.25

.22 .20 .15Auto purchase 35

.03

.09

.15

.34

.43

.40

.37

.39 .38 .22Auto operation 83

.54

.40

.72

1 .00

1 .02

1 .02

.97

.86 .74 .38Household appliances 04

.11

.05

.05

.05

.05

.05

C5

.04 .03 .02TV radio phonographs, etc 06

.11

.06

.06

.07

.07

.06

.06

.07 .06 .03Jewelry, luggage, personal care 11

.12

.10

.11

.14

.11

.11

.12

.11 .12 .10Sporting goods, club dues, admissions _ 06

.03

.04

.04

.05

.05

.05

.06

.06 .07 .08Documentary e 04

.06

.03

.03

.04

.03

.03

.02

.03 .05 .1 4Other transportation 08

.51

.11

.09

.11

.09

.05

.05

.05 .08 .14All other 14

.34

.21

.18

.18

.16

.16

.15

.14 .13 .10Estimate taxes as a percentage of total disposable receiptsb

Total Federal excise taxes 3.01

1 .89

2.39

2.80

3.32

3.41

3.29

3.13

3.06 2.81 2.19

a. A portion of Federal excise tax yields attributable to urban families and individuals was distributed by income classes in proportion to consumer expenditures by typ eas indicated by the Bureau of Labor Statistics . Survey of Consumer Expenditures 1960-61 . The proportion of excise tax yields so distributed was based on the ratio ofconsumer expenditures indicated by the BLS survey to a corresponding total of personal consumption expenditures shown in the national income and product ac-counts-

b. "Disposable receipts" equals money income after taxes plus other money receipts, plus increase in liabilities, plus decrease in assets .c- Average money income before tax in this class was $28,000 .d. The portion of these taxes falling on business services (47%) was distributed in proportion to total expenditures for current consumption .e• The portion of these taxes estimated to fall on issues and transfers of stocks and bonds (73.4%) was distributed in proportion to dividends received. The remain-

der was distributed in proportion to total expenditures for current consumption .Source: Tax Foundation estimates based on Bureau of Labor Statistics and Deoartment of Commerce data .

gregate demand and the money supply ,a general increase in prices could no toccur. Consequently, under these assump-tions, excise taxes cannot be fully reflecte din higher prices of the items taxed . Ifwe rule out any changes in aggregate de-mand and the money supply, the price sof other goods and services must fall .This will be effected in part through afall in the prices of the factors of produc-tion as resources are induced to leavetaxed industries .

Nevertheless, excise taxes, along withcosts of production, must be covered bythe price, and an increase in excise smeans that some rise in the prices of thetaxed items will occur while prices ofother goods and services tend to fall .Moreover, the additional taxes on somegoods and services will reduce the de-mand for the factors of production i nsuch industries and any factors which arespecialized, or cannot shift freely to othe rindustries at similar wages or rates ofreturn, will suffer a fall in income. A,tax on jewelry may affect the incomes o fpeople who work on jewelry, and the ymay not be able to find comparable in -comes working elsewhere . Such cases ,however, would seem to be of minor sig-nificance in the long run during whic hlabor and capital can be assumed to hav esubstantial mobility .

With Federal excises that apply t oonly about a fifth of total consumer ex-penditures, we can assume that most ofthe burden will be reflected in higherprices of the taxed items (see Appendi xI1) .

On this assumption, a recent Bureauof Labor Statistics survey" of urban famil yexpenditures by income class provides abasis for estimating the distribution of theburden of excise taxes .

The estimated excise tax burdens show nin Table 10 were obtained by distributing

excise tax collections attributable to urba nfamilies" among income classes in pro -portion to total expenditures for corres-ponding types of consumption as shownby the BLS Survey . For example, con-sumers with incomes under $1,000 ac-counted for 0 .55 percent of total expen-ditures on tobacco ; consequently, 0 .5 5r -rcent of tobacco tax collections wa sallotted to this income class ."' The esti-mated amounts of excise taxes alloted t oeach income class were then expressed asa percentage of the money income (beforetaxes) of all families in that income class .

The estimates in Table 10 indicate tha tthe tax on tobacco is the most regressiveportion of the present excise system . Itis followed closely by the tax on telephoneservice. The taxes on personal care, jewel-ry, and recreation appear to be nearl yproportional to income . The taxes onalcoholic beverages rise as a proportionof income up to an income level of abou t$5,000, while at higher income level sthe proportion falls off, but surprisinglyslowly . The taxes on automobile transpor-tation rise with income up to the $5,00 0income level, and thereafter fall off slowlyas a percent of income . Except 'or thelowest and the highest income classe sshown (under $1,000 and over $15,000) ,the total burden of Federal excises varieslittle in relation to income ; at an incomelevel of about $4,000 the excise ta xburden amounts to about 4 percent ofincome as compared with 3 percent forfamilies with incomes from $10,000 to$15,000 as well as for families with in -comes from $1,000 to $2,000 .

The regressivity of excise taxes in re-lation to income at very low income levelsis partly a reflection of the fact that a tthese income levels money income is nota satisfactory basis on which to measurethe burden of excise taxes. For familieswith incomes under $1,000, total expend-itures for current consumption exceede d

8 . Sum-es, 0 Consumer "X' e~ndttures, 1968 .61, BLS Report No, 237-18, April 1964, and Supplement 3-1 1 art A to HL SReport 237 .38 July 1964 .

9, The proportion of all categories of excise tax collections attributable to urban families was assumed to be 77 %percent, i,e, the ratio of totul consumption expenditures of urban families to the total for all families .

10, This procedure is equivalent to estimating an effective rate of tux (on consumption) for each type of excise an dapplying this rate to average family expenditures for the item in each income class .

37

income by 89 percent (Table 8) . Thismeans that people at these income levelshave a significant amount of "resources "other than current income. The BLS Sur-vey provides a measure of such re -sources in the "total receipts" (labele d"disposable receipts" in Table 10) o ffamilies in each income class . The tota lreceipts concept includes money incomeafter personal taxes, other money receipt s(gifts, inheritances, etc .) decreases in as -sets, and increases in liabilities (borrow-ing) .

It is evident from the bottom row ofTable 10 that the total burden of Federa lexcise taxes rises in relation to "tota lreceipts" up to an income level of abou t$5,000, and that at the lowest incom elevels it is substantially lower than theaverage for all income classes . While th etotal receipts concept has limitations fo rtax burden comparisons, it is evident thatthe excise taxes are not concentrated o nitems that bulk large in the total con-sumption of low income families .

However, the estimates in Table 1 0understate the burden of excises on item sof regular current consumption for lowincome families . The estimates are de -rived by an aggregative approach whic htakes only partial account of differencesin consumption patterns. Moreover, theexpendituie categories in the BLS Surveyare not exactly comparable with the bas eof excise taxes . Even in the cases of al-coholic beverages and tobacco, difference sin the make-up of expenditures (e .g., asbetween malt beverages and distilled spir-its, or as between cigars and cigarettes )will affect tax burdens on different con-sumers ,

Given the variety in size and consump-tion patterns of families, any "typica lfamily" concept inevitably has limitations ,The BLS Survey provides information

which would make it possible to estimat etax burdens for families of the same sizeat different income levels, although sam-pling errors become greater as the numberof families in a given category declines . "this study .''-Such estimates have not been made for

The BLS Survey also provides informa-tion on the percentages of families in eac hincome class reporting expenditures on agiven item. A substantial portion of Fed-eral excises are levied on business serv-ices and, insofar as they are shifte dforward, fall on all consumers . Moreover ,various excises, such as those on toile tpreparations, passenger cars, radio andtelevision sets, fall on items of nearly uni-versal use .' : ' In contrast, sizable numbersof families, particularly at low incom elevels, did not report expenditures fo rmany items on which excises are levied .In the lowest income class (income unde r$ 1,000), for example, 80 percent of fam-ilies reported no expenditures for alco-holic beverages and 65 percent reporte dno expenditures for tobacco .

In order to show the distribution of theburden of such taxes it is necessary totake into account the percentage of fam-ilies reporting the item of expenditur einvolved. This is done for selected itemsin Table 11 . The result is that the burde nof these taxes is shown to be larger andmore regressive than is indicated by th eestimates for all families given in Tabl e10 .

However, taking account of the per-centages of families reporting the ite mis appropriate only for items of regula rcurrent consumption . For durable good sand other items (such as travel outsid ethe home city) which t' a average familydoes not purchase every year, the per-centage of families reporting the item i snot meaningful for an estimate of the

11, 'The number of families In the sample by income class and region arc shown In "Tables to he used with Supplemen t3 to BLS Reports 217-34 to 237-38, inclusive," (Mimco .) The total number in the rumple was 9,476, Singl epersons accounted for 181 of the 215 "families" with Incomes under $10H) .

12 . For an estimate of tax burdens for four-person urban families at various Income levels in 1959, see James R ,Beaton, "Family Tax Burdens by Income Levels," National Tax Journal, March 1962, pp, 14 .25 ,

13, In 1961 over 90 percent of all families had it television set, and over NO percent owned it radio and refrigerator ,(Thomas R, Tibbets, "Expanding Ownership of Household Equipment," Monthly Labor Review, October 1964 ,p . 1133,) The BLS Survey indicates that 71 percent of families owned or operated an automobile ,

38