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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM p te )ffice Correspondence Xo Chgdrman Secies From Hi chard k. Llusgrave * Subject: February 15, I&S Capital gains Proposal r V|< The capital gains proposal was discussed at yesterday's meeting of the Interdepartmental Tax Committee. Xou may be interested in a brief summary of the views expressed. Mr. Blough primarily emphasized the difficulties involved in convincing Congress that such a measure i s necessary. He believes that to have the proposal accepted i t would be necessary to present the dangers and likelihood of an imminent drastic inflation in capital values in the strongest terms, and that this scare in itself may have the very effect "which the tax i s meant to avoid. Also, he i s concerned with the implications of the tax for the transition period when some investment will be desirable in the interest of prompt re-conversion. However, this i s somewhat less important than the first point. Hr. Colm (Budget Bureau)f after having discussed the natter with the Director of the Budget, indicated that they were much impressed by the equity aspect of the arguxnent and the need for preventing war profiteering in capital values as a matter of maintaining morale at the home front. He indicated that he was l i t t l e impressed by the economic aspects of the argument either with respect to financing or -with respect to the effects upon the general stabilization program. However, he would favor some action on equity grounds although he was non-committal as to whether as drastic a proposal could be justified on equity grounds only. Mr. Henry liurphy (Treasury) sympathized with the equity aspects of the proposal but was concerned that pressure and publicity necessary to get i t through Congress would have a bad effect on the security market. Taking the general position that i t does not make very much difference with respect to inflation potential, whether the Treasury borrows frcm banking or non-banking sources, he appeared to think that the tax proposal might do financing more harm than good. Mr. Pritchard (close assistant to Judge Vinson) agreed that some action was desirable but thought that this proposal would have no chance of acceptance in Congress and that i t s publicity effects might be most damaging. If adopted, he felt that i t would be difficult to obtain the administrative discretion necessary to taper i t off promptly. He believes that the advantage of approaching the problem by way of credit measures i s that such policy could, to some extent at least, be undertaken without - 2 - Congressional action and similarly could be "withdrawn promptly. He i s not sure whether credit controls would do the job but thinks that this i s "where the beginning should be made* 1) because i t can be done more simply and with less noise, and 2) because a credit financed inflation of capital values i s particularly damaging to the debtor when values collapse. Walter Salant (assistant to j£ichard Y. Gilbert, Director of Research at the Office of Price Stabilization) suggested that the tax "would not meet "what i s perhaps the nost serious point at which an increase in values may undermine the stabilization program, namely houseowners who by-pass rent ceilings by forcing tenants to buy at exhorbitant prices. Since these are mostly people who must have a place to live rather than speculators, they would not be deterred by the tax nor xvould the sellers who in most cases had possession prior to January 1. Mr* Salant also shared the concern that politically the "tax would be a most difficult proposition* The discussion i s to be continued at a second meeting tomorrow.
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