C. Harry Kahn

Daniel M. Holland

Harvey E. Brazer

Lawrence H. Seltzer

English

Research Papers in Economics

This PDF is a selection from a published volume from the National Bureau of 
Economic Research
Volume Title: Basic Research and the Analysis of Current Business Conditions, 
Thirty-sixth Annual Report 
Volume Author/Editor: Solomon Fabricant
Volume Publisher: NBER
Volume URL: http://www.nber.org/books/fabr56-1
Publication Date: May 1956
Chapter Title: Staff Reports: Governmental Activity and Finances
Chapter Author: Lawrence H. Seltzer, C. Harry Kahn, Daniel M. Holland, 
Harvey E. Brazer
Chapter URL: http://www.nber.org/chapters/c1299
Chapter pages in book: (63 - 67)The Pattern of Financial Asset Ownership: Wis-
consin Individuals, 1949, by Thomas R. Atkin-
son (in press)
Patterns of Farm Financial Structure: A Cross-
Section View of Economic and Physical De-
terminants, by Donald C. Horton (in press)
Raymond W. Goldsmith's "Financial Inter-
mediaries in the Saving and Investment Proc-
ess in the American Economy, 1900-1952,"
is being prepared for press.
Four reports will shortly be ready for re-
view by the Board:
"Bank Stock Prices and the Bank Capital Prob-
lem," by David Durand
"Corporate Bond Quality and Investor Experi-
ence," by W. Braddock Hickman
"Federal Programs of Lending, Loan Insurance,
and Loan Guarantees," by R. J. Saulnier, Neil
H. Jacoby, and Harold 0. Halcrow
"International Financial Transactions and Busi-
ness Cycles," by Oskar Morgenstern
Wolfgang Stolper's manuscript, "Economic
Fluctuations and Urban Real Estate Finance,"
is being reviewed by the staff. The reference
volume, "Statistical Measures of Corporate
Bond Characteristics and Experience," by
W. Braddock Hickman, is nearing completion.
A preliminary report on certain phases of
the study of agricultural credit institutions was
prepared by George K. Brinegar.
Other studies in banking and finance are re-
ported in Part Two and in Sections 1 and 2.
5. Governmental Activity and Finances
TIlE INDIVIDUAL. INCOME TAX
Occasional Paper 51, interest as a Source of
Personal income and Tax Revenue, has been
published. It presents one section of the study
of the individual income tax on which I have
been engaged for some time. I am now devot-
ing my attention to the relations between per-
sonal and taxable income and, more immedi-
ately, to the personal exemptions and credits
for dependents.
Between 1925 and 1935, the total number
of persons who paid income taxes, and their
dependents, ranged only between 3 million
and 5 million a year, and accounted for only
between 2.5 per cent and slightly more than
4 per cent of the country's population. By
1952, they exceeded 100 million and accounted
for not far from two-thirds of our total popu-
lation. This great change was the joint product
of statutory reductions in the personal exemp-
tions and the substantial growth and wider
diffusion of personal incomes.
In line with other evidences of the rise and
wider diffusion of personal incomes in very
recent years is that provided by the changed
distribution among the different income groups
of the dollar amounts of personal exemptions
and credits for dependents reported on taxable
aggregate returns. Between 1948 (when the
law first permitted income splitting between
husbands and wives filing joint returns) and
1952, the aggregate amount of these allow-
ances going to taxpayers with adjusted gross
income under $3,000 fell by $3.8 billion or
22 per cent; the amount going to those with
adjusted gross incomes between $3,000 and
$5,000 rose by $4 billion or 18 per cent; and
the amount going to taxpayers with adjusted
gross incomes between $5,000 and $10,000
rose by $11.8 billion or 137 per cent.
The proportion of the total dollar amount
of personal exemptions accounted for by those
with gross incomes of less than $3,000 fell
from 34 to 21 per cent between 1948 and
1952, and the proportion of the total accounted
for by taxable returns with gross incomes of
$3,000 to $5,000 fell from 44 to 41 per cent.
But the proportion of the total accounted for
by those with gross incomes of $5,000 to
$10,000 rose from 17 per cent in 1948 to 32
per cent in 1952. This income group accounted
for 90 per cent of the entire increase in aggre-
gate personal exemptions in this period. The
foregoing figures are all exclusive of exemp-
tions for old age and blindness and exemp-
tions on returns reporting self-employment tax
only.
Another phase of the study of the mdi-
63vidual income taxisreported below by
C. Harry Kahn.
LAWRENCE H. SELTZER
Personal Expense Deductions
During the greater part of the past year I have
been working on the completion of a study of
the personal expense deductions allowed un-
der the individual income tax, a part of which
appeared in preliminary form in Federal Tax
Policy for Economic Growth and Stability.'
Unlike business expense deductions, these de-
ductions from the tax base are (with some ex-
ceptions)associatedwiththedisposition,
rather than with the creation, of an individual's
income. Unlike the personal exemptions, they
apply to a few specific types of expenses rather
than being a generalized and neutral per capita
allowance.This study thus deals with one
aspect of the derivation of the tax base.
Table 9 shows our estimates of the effects
of personal deductions and exemptions on the
tax base over the period 19 18-1952. We start
with total adjusted gross income, which is the
estimated country-wide total of personal in-
come adjusted to correspond to the currently
used tax return concept of income. Personal
exemptions have declined over the years in
relative importance, and personal deductions
have risen somewhat. As recently as 1952,
their estimated combined amount has exceeded
that of the tax base in every year, but in 1918
the exemptions took up twelve times as much
income as the deductions while in 1952 they
were only three times as large. These figures
reveal two important features in the develop-
ment of the modem income tax:
1. The amount of income eliminated from
the tax base, by statute, within the aggregate
that is conceptually designated as the tax base
(as opposed to income that lies conceptually
outside the tax base by not being part of ad-
justed gross income) is still very large. While
1 Joint Committee on the Economic Report, 84th
Cong., 1st Sess., November 1955.
TABLE 9
RELATIVE IMPORTANCE OF PERSONAL DEDUCTIONS AND EXEMPTIONS IN
ACCOUNTING FOR GAP BETWEEN TOTAL ADJUSTED GROSS INCOME AND
TAX BASE, SELECTED YEARS, 1918-1952
191819261933 1946 1951 1952
(millions of dollars)
1. Total adjusted gross incomea 49,99968,67635,524155,550228,547240,645
2. less estimated:
a.Leakageb 2,6623,7851,83419,04723,21922,146
b.Deductions' 3,0937,4593,86814,76124,48426,782
c.Exemptionse 36,12346,28725,95055,92080,73783,671
3. equals: Tax base" 8,12111,1453,87265,822100,107108,046
. (percent)
4. Amount removed from tax base by:
a.Deductions (line 2bline 1) 6.2 10.7 10.9 9.5 10.7 11.1
b.Exemptions (line 2c --line1) 72.2 67.4 73.0 36.0 35.3 34.8
a Commerce Department's personal Income figures adjusted for differences in concept by Joseph A. Pechman,
and incorporating changes made by Lawrence H. Seltzer, for years later than 1929. Years prior to 1929:
Kuznets' income payments estimates adjusted by Seltzer for differences in concept.
b "Leakage" refers to underreporting and statistical errors in estimating. For 1946, 1951 and 1952 our estimates
are based on the income reported on all tax returns plus an estimate of the income received by those whose
adjusted gross income was less than that stipulated as a filing requirement. For the earlier years no data for
this purpose are available to us, and we therefore extrapolated the 1945-1946 relation between leakage and
income reported on all returns back to the interwar period.
e These figures are in part based on the amounts actually claimed on taxable returns, and in part on ratios
revealed on nontaxable returns.
d This is the taxable net income as estimated from taxable return data in Statistics of Income.
64it declined sharply from over 80 per cent in
pre-Worid War II years to about 46 per cent
of total adjusted gross income in 1952 after
some leakage due to underreporting, we are
still left with only 44 per cent of the 1952 total
in the actual tax base.
2. The amount of income thus removed
from the tax base is less than formerly related
to population and family size, and more to cer-
tain types of personal expenses and size of in-
come (as the result of the optional standard
deductions).
Table 10 repeats the steps taken in Table 9,
except that this time we start out with income
reported on taxable returns.The tax base
figure in line 3 is, of course, the same in both
tables. The table shows the remarkable stabil-
ity over time of the ratio of the tax base to the
income of taxpayers. This is largely due to the
equally stable ratio of exemptions to taxpayers'
income. The latter has varied between 0.32
and 0.38 in the majority of the years between
1918 and 1952.
This finding is somewhat surprising in view
of the substantial changes in both the level of
incomes and exemptions over this period.
However, whenever exemptions are lowered,
or national income rises, or both, the exemp-
tion-income ratio of the old taxpayers tends to
fall, but the new taxpayers who are just enter-
TABLE 10
ing the taxable group have, on the average, a
high exemption-income ratio. Our figures in-
dicate that the entrance of new taxpayers, with
high exemption-income ratios, was at most
times just sufficient to offset the falling ratios
of the old taxpayers. Not that this had to hap-
pen, a priori, or that it will necessarily con-
tinue to happen. Nevertheless, this observation
provides us with a fairly good clue to the in-
come elasticity of the tax, an important ele-
ment of its built-in flexibility.
We have also attempted to give a quantita-
tive historical account of each of the major
deductible items, such as the philanthropic
contributions, non-business interest payments,
state and local personal taxes, and medical ex-
penses.In 1952, these itemized deductions
accounted for slightly more than one-half of
the total deductions on taxable returns, the
rest being taken in the form of the optional
standard deduction. The latter was introduced
as a tax simplification measure in 1944. In
that year, 63 per cent of the total was taken in
the standard form, but since then this figure
has declined steadily to its present level of just
below 50 per cent.
The reason for this appears twofold:
1. There has been a perceptible upward
trend in the major deductions in recent years.
In the case of the interest, taxes, and medical
DEDUCTIONS ANDEXEMPTIONSON TAXABLERETURNS,
SELECTED YEARS,1918-1952
1918 1926 1933 1946 1951 1952
(millions of dollars)
1. Adjustedgrossincome 15,22319,4767,971118,721183,935197,331
2. less:
a.Deductions 1,3302,0871,00513,24522,400 24,750
b. Exemptions 5,7726,2443,09439,65461,42864,535
3. equals: taxbase 8,12111,1453,87265,822
(percent)
100,107108,046
4. Adjusted gross income 100.0100.0100.0 100.0 100.0 100.0
5. less:
a.Deductions 8.7 10.7 12.6 11.2 12.2 12.5
b.Exemptions 37.9 32.1 38.8 33.4 33.4 32.7
6. equals: tax base 53.4 57.2 48.6 55.4 54.4 54.8
Note: The adjusted gross income concept was not introduced until
own estimates based on Statisticsof income data.
1944. The figures forprior yearsare our
65expense deductions, this growth has also been
observed in the underlying expenditure aggre-
gates. For philanthropic contributions, no re-
liable aggregate series is as yet available.
2. There have been continued,though
small, liberalizations in the legal definition of
what constitutes allowable personal expense.
It should be noted that the rise in incomes
appears to have had little, or no, direct bearing
on this development since we find that within
the taxable return category, the income subject
to the 10 per cent standard deduction has not
changed appreciably in relative amount since
1948. Indeed, since 1944, it has risen because
of the extension of the upper limit on the
standard deduction from $500 to $1,000 in
1948.
C. HARRY KAHN
THE TAX TREATMENT OF
STOCKHOLDERS
"The Differential Tax Burden on Stockhold-
ers" has been approved by the directors, and is
being prepared for publication. The contents
of the study are indicated by the chapter titles:
Chapter
1Introduction
2The Results for 1950
3A Summary of Our Findings, 1940-1950
4Alternative Measures of the Differentials
against Net Corporate Earnings and
Stockholders
5The Taxation of Corporate Earnings and
Progressivity
6Some Revenue Aspects of the Differential
Taxation of Stockholders
7The Relief Provisions of the Internal
Revenue Code of 1954
8Summary and Conclusions
DANIEL M. HOLLAND
CITY EXPENDITURES IN THE
UNITED STATES
In our study of the factors influencing varia-
tions among 462 cities in per capita expendi-
tures on various services, it turned out to be
66
important to take account of differences in the
degree to which certain functional responsi-
bilities are divided between the city and other
governmental authorities. Accordingly, sepa-
rate multiple regression analyses were carried
out for the cities of California, Massachusetts,
and Ohio, and for the forty largest cities whose
expenditures for 1953 could be combined with
those of their overlying local governments.
The results in each of the four cases reveal
a far closer association between the various
categories of expenditure studied and popula-
tion size and density, family income, state aid,
and the ratio of employment in manufacturing,
trade, and services to population than did the
analysis for all 462 cities taken together. While
the latter, for example, produced coefficients
of multiple determination no higher than .24,
only five of thirty-three of the corresponding
coefficients for the four subgroups are as low
as, or lower than, this value, and others range
upwards to .70, after correction for the reduc-
tion in the number of degrees of freedom.
Similar increases appeared in the regression
and elasticity coefficients.
For the forty large-city areas we could not
only combine expenditures of the cities and
their overlying units of local government, but
also test the hypothesis that the lower the ratio
of the central city's population to that of its
metropolitan area, the higher its per capita ex-
penditures on major functions. A decline in
the population ratio implies an increase in the
proportion of persons for whom public serv-
ices must be provided by the city but who are
not a part of the city's own population. Our
results give strong support to the hypothesis.
Examination of the data for all cities sug-
gested that there is a substantial degree of as-
sociation between the per capita amounts
spent by cities and the nature of the city. Ac-
cordingly, the 462 cities were classified into
seven groups: core cities of major (population
250,000 and over) and minor (population
under 250,000) metropolitan areas, high and
low income residential suburbs, industrial sub-
urbs, cities not part of a "standard" metropoli-
tan area, and major resort cities.Differences
in expenditures among groups of cities classi-fled in this fashion were statistically significant.
The results of our analysis, therefore, sug-
gest strongly that a substantial part of the vari-
ance in expenditures "unexplained" by the
independent variables in the study of the 462
cities may be due to differences in (1) the dis-
tribution of functional responsibilities among
local governments from state to state, (2) the
ratio of city to metropolitan area populations,
and (3) the nature of the city with respect to
its classification according to the criteria indi-
cated above.
HARVEY E. BRAZER
OTHER STUDIES
The varied activities of government are re-
flected in the three reports published during
1955 and the two in press:
The Ownership of Tax-Exempt Securities, 1913-
1953, Occasional Paper 47, by George E. Lent
A Century and a Half of Federal Expenditures,
Occasional Paper 48, by M. Slade Kendrick
Minimum Price Fixing in the Bituminous Coal
industry, by Waldo E. Fisher and Charles M.
James
The Growth of Public Employment in Great
Britain, by Moses Abramovitz and Vera Elias-
berg (in press)
Fiscal-Year Reporting for Corporate Income Tax,
Technical Paper 11, by W. L. Crum (in press)
"Federal Programs of Lending, Loan Insur-
ance, and Loan Guarantees," by R. J. Saul-
flier, Neil H. Jacoby, and Harold G. Haicrow
will shortly be ready for review by the Board.
John Firestone's manuscript on the cyclical
behavior of federal revenues and expenditures
since 1879 is being revised.
The statistical work on the monograph on
the growth of British governmental expendi-
tures, 1890-1950, by Alan T. Peacock of the
London School of Economics, is largely com-
pleted. Several chapters are in draft form.
Morris Copeland's report on his study of
governmental financial capital requirements is
in Section 2, and Roland I. Robinson's report
on his study of the markets for government
securities is in Section 4. Two new studies are
reported briefly in Part Two. One is a broad
exploration of the needs for research on the
economic effects of public and private pension
programs; the other is concerned with the anal-
ysis of newly available data on state and local
government expenditures.
6. International Economic Relations and Foreign Economies
ECONOMIC GROWTH OF THE
SOVIET UNION
The object of this study, begun in 1954 under
a grant from the Rockefeller Foundation, is to
set forth and analyze the evidence bearing on
the question: How rapidly has the Soviet econ-
omy been growing in the past thirty years? The
study was undertaken in full recognition of the
inherent difficulty of arriving at an answer to
this question and of the special difficulties at-
taching to the securing of reliable information.
In addition to the work reported on sepa-
rately, studies are also being made of Soviet
housing construction, labor force and popula-
tion, and standard of living. Work in these
areas is being done by Leo Grebler, Carolyn
Shilling, Harold Wool, and Nancy Baster.
industrial Production
The task of assembling annual figures on out-
put and adjusting them to take account of the
absorption of "small-scale" industry has been
essentially completed, and some preliminary
analysis has been started.
A cross-sectional view of the output series
is given in Table 11.The count of series
should not be taken too literally since there is
some overlapping. In addition, a large number
of subsidiary series covering relatively short
periods, or containing pronounced gaps, are
not included in the table. The best coverage
is for 1928 through 1937 and for industrial
materials. Here again a word of caution is
called for, however, since almost all series
contain minor gaps in the periods covered.
67

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