REVENUE BILL OF 1918. SEPTEMBER 3, 1918.-Committed to the Committee of the Whole House on the state of the Union and ordered to be printed. Mr. KITCHIN, from the Committee on Ways and Means, submitted the following REPORT. [To accompany H. R. 12863.] The Committee on Ways and Means, to whom was referred the bill (H. R. 12863) to provide revenue, and for other purposes, having had the same under consideration, reports it back to the House without amendment and recommends that the bill do pass. THE FIRST PROBLEM IN DETERMINING OUR FISCAL POLICY TO FINANCE THIS WAR. In determining our fiscal policy for financing the war the first question that must be determined is, what per cent of our total expenditures shall be financed by taxation and what per cent by bonds? Your committee has determined the proportion of the cost of the war that should be financed by taxation and by bonds not upon the basis of previous experience, for there is no analogy in history, but upon a careful consideratian of the effect of the fiscal policy upon the morale of the people, upon the inflation of prices, upon production, and with reference to the relative ability of the people to pay taxes now and after the war. On June 5 the Secretary of the Treasury advised your committee that the probable expenditures for the fiscal year ending June 30, 1919, would be about $24,000,000,000 and recommended that onethird of this amount be raised in taxes, or $8,000,000,000. On July 15 Mr. Sherley, chairman of the Appropriations Committee of the House, confirmed the estimate of the Secretary of the Treasury and set out in detail the appropriations for this fiscal year, the total of which amount to $24,328,561,427.67, exclusive of contract authorizations. PREPARATION OF THE MEASURE. On May 27, 1918, the President addressed the Congress in joint session and recommended that the Congress set to work immediately to draft the new revenue measure and recommended that the necessary additional taxes be secured from war profits, incomes, and luxuries. The Ways and Means Committee immediately began the preparation of the new measure, and on May 29, 1918, the chairman, after conference with the Ways and Means Committee, gave out the following statement relative to hearings on the proposed new revenue bill: The Committee on Ways and Means announce to all concerned that it will hold public hearings at Washington, D. C., beginning June 6, 1918. It is deemed necessary largely to increase the revenue from taxation. It seems to the committee that it will be necessary to raise the necessary increased revenue chiefly from taxes upon incomes, excess of war profits, luxuries, and semiluxuries. In the preparation of the new tax measure the committee will give careful consideration to all suggestions with reference to the measure, together with suggestions of other revenue sources. Your committee sat in daily hearings from June 7 to July 17, and since that time has been in continual daily session engaged in the preparation of the measure. At the beginning of the preparation of the new measure your committee accepted the fiscal policy, suggested by the Secretary, as sound, and determined to prepare a new revenue bill that would raise during a 12-month period $8,000,000,000. In making the decision to recommend that one-third of the expenditures for the current fiscal year be raised by taxes and two-thirds from the sale of bonds, your committee has been guided by conditions existing at the present time. While your committee makes this recommendation for the current year, it realizes that no fixed policy as to the relation of taxes to bonds for the future can be determined at this time and that the amount that should be raised by taxation in any given year must necessarily be determined after due consideration is given to business and financial conditions existing in such year. Your committee further adopted the policy that so far as practicable the $8,000,000,000 should be raised from taxes on incomes, excess and war profits, and luxuries and semiluxuries. Throughout the preparation of the measure your committee has endeavored to distribute equitably the new tax burden and to levy the taxes in such a way that the burden should be met by those most able to pay. Your committee has endeavored to wipe out all inequalities in the operation of existing law and recommends the repeal of the major portions of the revenue acts of 1916 and 1917 in order that the existing internal-revenue laws so far as deemed practicable will be in one act and therefore more readily accessible to the taxpayer. A law of so great magnitude as this with the necessary exemptions and similar provisions in the interest of quality and justice must of necessity be more or less complicated, but your committee has striven to make this bill as simple and clear as possible in every particular. Title V. Tax on transportation and other facilities and on insur ance. Title VI. Tax on beverages. Title VII. Tax on cigars, tobacco, and manufactures thereof. Title IX. Excise taxes. Title X. Special taxes. Title XI. Stamp taxes. Title XII. Advisory Tax Board. Title XIII. General administrative provisions. Title XIV. General provisions. TITLE I. GENERAL DEFINITIONS. This title contains definitions applicable to the entire bill. The following terms are defined in this title: Person, corporation, domestic, foreign, United States, Secretary, commissioner, collector, revenue act of 1916, revenue act of 1917, taxpayer, and Government contract. TITLE II. INCOME TAX. Part I. GENERAL PROVISIONS. DEFINITIONS. Part I of Title II contains the definitions applicable to the income tax only. In this part (sec. 200) the following terms are defined: Taxable year, fiscal year, fiduciary, withholding agent, and dividend. This part (secs. 201 and 202) also states the basis for determining gain or loss and for taking inventories. The dividend provision makes any distribution made by a corporation out of its earnings or profits accrued since February 28, 1913, and payable to its shareholders or members, whether in cash or in other property or in stock of the corporation, subject to tax in the hands of the shareholder, the same as under the present law. It also provides that any distribution made in 1918 or subsequent years shall be deemed to have been made from earnings or profits accrued since February 28, 1913. The present law provides that dividends distributed to the stockholder shall be taxable to the individual at the income-tax rates in effect in the year in which the dividend is received, unless the corporation distributes more than its earnings for the taxable year, in which case the additional amounts so distributed are taxable in the hands of the individual at the rates in effect during the year in which the corporation earned the same. Under the proposed bill all distribution of earnings accrued since February 28, 1913, will be taxable in the hands of the stockholder according to the rates in effect during the year in which the dividend HR-65-2-vol 2- -52 is received. The proposed bill, like the present law, provides that earnings or profits accrued prior to March 1, 1913, may be distributed in stock dividends or otherwise exempt from tax after the earnings and profits accrued since February 28, 1913, have been distributed. Under court decisions an addition to surplus through reappraisement of assets is not made out of earnings or profits, and therefore a distribution of the amount so added to surplus would not be a taxable dividend, since not made out of earnings or profits. In order to prevent tax evasion by this method, it is provided by the proposed bill that any distribution made shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. BASIS FOR DETERMINING GAIN OR LOSS. In determining gain or loss from the sale or disposition of property, real, personal, or mixed, the bill provides that the basis shall be as follows: In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and in the case of property acquired on or after that date, (1) the cost thereof, or (2) the inventory value, if the inventory is made in accordance with the rules and regulations to be prescribed by the Commissioner of Internal Revenue in order that the inventory may clearly reflect the income. INVENTORY. In many cases the only way that the net income can be determined is through the proper use of inventories. This is largely true in the case of manufacturing and merchandise concerns. The bill authorizes the commissioner to require inventories whenever in his opinion the same is necessary in order clearly to reflect the income of the taxpayer. Part II. INDIVIDUALS. NORMAL TAX. Under existing law a normal tax of 2 per cent is levied under the revenue act of 1916, upon the amount of the net income of a head of a family or married person in excess of $4,000 and upon the amount of the net income of a single person in excess of $3,000. A like normal tax of 2 per cent is also levied under the revenue act of 1917 upon the amount of the net income of a married person or head of a family in excess of $2,000 and in the case of a single person in excess of $1,000. In lieu of the rates now in effect the proposed bill (sec. 210) levies upon citizens or residents of the United States a normal tax of 12 per cent upon the amount of the net income in excess of credits provided in section 216, but provides that upon the first $4,000 of this amount the rate shall be only 6 per cent. UNEARNED INCOME. The committee gave careful consideration to the advisability of making a differential between earned and unearned income, but finally determined that a flat normal tax was advisable in view of the |