Law of 1938

Last week Kentucky's rangy, long-faced Representative Fred Moore Vinson rose in the House to put the finishing touches on a job that has kept him sweating since last November, when he started work as chairman of a Ways & Means Subcommittee to draft the Revenue Bill of 1938. Well-informed Taxman Vinson took the floor without notes. The bill he proposed to defend against all comers was neither his committee's nor the much-amended Senate bill sponsored by Pat Harrison. It was a patched up compromise between the two, which the Senate had hustled through two days before without a record vote. Congressman Vinson, who has always tried to do his level best for Franklin Roosevelt, drawled: "We have done our dead level best to ... be helpful to business recovery." By no means reassured but heartily sick of six months' talk about taxes, the House discussed the bill briefly, extended the hour allotted for discussion to pay tributes to Member Vinson, who had been rewarded for his labors by a $12,500 appointment to the District of Columbia Court of Appeals. Then it passed the measure 242 votes to 89, sent it to the White House for signature.

Prime purpose of the Revenue Bill of 1938 is to raise $5,300,000,000 for the U. S. Treasury. Of this, slightly more than half will be paid in manufacturers' excise and miscellaneous taxes. The remaining $2,490,000,000 will be paid as taxes on individual and corporate incomes (and on gifts and as death duties by some 9,000 U. S. citizens expected to leave estates larger than the $40,000 exempt from tax).

Corporations will be sharply divided for tax purposes between the 88% making $25,000 a year or less and the other 12% constituting Big Business. How the corporation income tax will work:

Corporation A reports a net income of $25,000, of which $20,000 was distributed in dividends. Under the 1936 law it would have been liable, besides a normal tax ranging from 8% on its first $2,000 up to 15% on all over $40,000, to a special tax ranging from 7% on any undistributed profits constituting 10% or less of its net income, to 27% on all over 60%. Corporation A's normal tax would have been $2,890, the tax on its 10% undistributed profits $147.70. Total: $3,037.70. Under the 1938 bill Corporation A will pay no penalty on its undistributed profits, a tax of 12 1/2% on its first $5,000, 14% on its next $15,000, 16% on the next $5,000. Total $3,525.

Corporation B reports a net income of $1,000,000, of which $200,000 was distributed in dividends. Under the 1936 law Corporation B would have paid a normal tax of $148,840. Because it retained more than 60% of its earnings, it would also have paid up to the maximum rate of 27% on its undistributed profits, another $120,487.80. Total: $269,327.80. Under the 1938 bill, corporations earning more than $25,000 will pay a flat tax of 19% minus 2 1/2% of the amount it distributed in dividends. If Corporation B retains the same share of its profits, it will pay a total tax of 18.5%, or $185,000.

Individual income tax rates will continue to be the same as under the Act of 1934. Only difference is a simplification in the provision relating to gains from the sale of capital assets. Under the 1934 law Taxpayer A, who sold for $10,000 a block of securities that had cost him $5,000, would have been required to list his $5,000 gain from the deal as regular income, listing all of it if he had held the securities less than twelve months, 80% of it if he had owned them from one to two years and on down to 30% for ten years or longer. Under the 1938 law, if Taxpayer A has held his securities less than 18 months, all of his $5,000 profit will be taxed as regular income. If he has held them between 18 months and two years, 66 2/3% of his gain will be taken into account as regular income, or 50% if he held them more than two years. A taxpayer may take the alternative, if it would result in a smaller total tax, of paying a flat 30% tax rate on 66 2/3% of a capital gain if his assets have been held between 18 months and two years, or on 50% if they have been held more than two. If Taxpayer B bought some securities for $10,000 and sold them for $5,000 in less than 18 months, he can carry his $5,000 loss over until the next year, deduct it from a $5,000 short-term gain on another deal and wipe his slate clean. But if the securities he sold at a loss had been in his possession more than 18 months his $5,000 is a "longterm loss" and he can deduct only $2,000 of it from his return.

Other Changes. Of the 250 minor differences between the old law and the 1938 bill most interesting to the average U. S. citizen: reduction of the exemption on individual gifts from $5,000 to $4,000, elimination of the present 10% tax on toilet articles, excise taxes on domestic matches, chewing gum, furs, phonograph records, sporting goods, cameras and lenses, an upping (on the word of New York's Representative John J. O'Connor that no one could spend more than 50-c- making a gallon of whiskey) of the present $2 tax on a gallon of distilled spirits to $2.25.

This file is automatically generated by a robot program, so reader's discretion is required.