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cl ^pul h October 28, 1943. COMPULSORY SAVINGS There is a disturbing tendency in some quarters to underestimate the importance of strong fiscal action at this time* One reason would seem to be that, despite a serious and growing inflationary gap for more than a year, no inflationary torrent has yet gushed through it. The explanation of this fortunate but highly unreliable result is that individuals have refrained from spending the full amount of their incomes. They have done so on a scale that is entirely without precedent — and as a result have immobilized for the time being a huge volume of funds that could have swamped the markets for goods. This circumstance suggests a fact of crucial importance. The immobilization of those funds is not assured. It remains a matter of discretion with the public. And some day the public can and may well change the pace of its buying. Considered from this approach, a strong and positive case can and should be made for compulsory savings. The most common objection to compulsory savings is that voluntary investment by individuals in government securities would tend to be reduced. The answer rests on the fact that tax increases operate in the same manner9 and that voluntary lending is not the primary goal of a fiscal program. The first aim of a fiscal program is to provide the Treasury with assured sources of revenue by compulsory means — heretofore, taxes. If it were practicable to do the whole job this way, no one in authority would wish to rely on voluntary contributions. Since that is not practicable, compulsory measures are used in so far as the judgment of Congress and the technique of writing equity into tax legislation permit. Then these measures are supplemented by a sustained effort to absorb additional amounts of private funds through the sale c£ government securities on a voluntary basis (in order further to reduce the need for the Treasury to rely on bank credit). Compulsory savings are proposed as part of the business of providing the Treasury with assured funds by compulsory means. By definition, they should take precedence over voluntary lending to the government. This leads to the most important point, the fact that compulsory savings provide the Treasury with an opportunity to correct at least partially the trend toward the accumulation in private hands of an excessive volume of virtual demand obligations in the form of savings bonds (now about $26 billion). - 2- Compulsory savings can and should be restricted as to redemption so as to afford the Treasury some measure of discretion in timing repayments* So long as we are committed to the present form of savings bonds for voluntary purchasers, there would be a positive advantage in shifting substantial amounts of private savings into some form of compulsory savings — thus restricted as to redemption. This point is of tremendous importance in connection with postwar problems. Prevailing conditions require that a disproportionate amount of purchasing power be drawn away from the lower income brackets. In the face of this necessity, the requirements of equity will be better served if the burden on these groups is coupled with arrangements for repayments after the peak of wartime payrolls has been passed. A corolary point is that compulsory savings could be arranged so that they could be made available at times when individuals and the econongr of the country would be most benefitted. The attitude of some people toward even the mention of compulsory savings suggests a feeling that there is something positively sinister about the idea. Doubtless, this stems from an instinctive reaction against any association between compulsion and the act of saving — which some still regard as an entirely voluntary procedure. But the governments systems of unemployment and old age insurance are forms of compulsory savings — and meet with general approval. Or put it this way: compulsory savings, like taxes, do interfere with the individualfs program of voluntary savings — but they do have the advantage from the taxpayer's point of view that he gets them back — they are savings. October 28, 1943. SALES TAX VERSUS INCOME TAX It is agreed that a substantial aaount of the additional tax revenue must be drawn from the lower income groups if taxes are to be an effective check to inflation* More specifically, a good part of the additional revenue should be drawn from taxpayers with incomes of #2,000 or less. But this still leaves open the choice between taxing the low income groups through a sales tax or through an income tax. Political Aspects The sales tax is much more likely to result in demands for higher wages and possibly farm prices. Should this be the case, a sales tax may well result in a net loss rather than gain in the fight for inflation control* Equity Aspects Equity considerations remain important in tax legislation, even in times of war. They become particularly important if, as is the case now, taxes must be collected from the very low income groups. There is as much or more difference between the taxpaying ability of a family with a #2,000 income and a family with a #1,000 income than between a family with a #10,000 income and a family with a $5*000 income. In the low income groups, personal exemptions are the most important factor in obtaining a fair distribution of the tax burden (progression is more important for the higher income groups). On equity grounds, the income tax, however low the exemption, is thus greatly superior to the sales tax. The smaller a man's income, the heavier is the burden of the sales tax. Administrative Aspects If the income tax approach is taken, it will be necessary to lower exemptions for families to #1,000, or perhaps even #800. This would add from 5 to 10 million taxpayers to the 40 million already covered, and would undoubtedly create an administrative burden. However, this burden should not be exaggerated: 1. As the Treasury emphasizes, the retail sales tax by itself creates a most serious administrative burden. It is altogether unlikely that a sales tax could be passed which is sufficiently high to permit a substantial increase in income tax exemptions and thereby offset the administrative burden. 2. The experience with the Victory Tax and with collection at the source has greatly improved our ability to deal with the direct taxation of low incomes. If the income tax applicable to lower income groups were simplified radically, the administrative task would be quite manageable. Surely, it would be less than that of adding a general sales tax to the present income tax. 3. To simplify the income tax, taxpayers with incomes up to perhaps $2,500 or $3,000 should be relieved from having to file returns. The tax should be collected on gross income after exemptions and the withholding tables used by the employer should set the final tax. Rather than a general sales tax, we should have sharp increases in many existing excises as well as new excise taxes on broadly consumed but not really essential commodities. DISTRIBUTION OF BURDEN BY INCOME GROUPS UNDER ALTERNATE METHODS OF TAXATION (YIELD* 3 BILLION DOLLARS) PER CENT OF INCOME TAKEN BY TAX PER CENT OF INCOME TAKEN BY TAX AVERAGE FAMILY SINGLE TAXPAYER 5 A > A / • v / V B / / • X X / / \ / \ > / \ / ^/ \ \ 1 1 / / / / / / / / / / / * / / / / / / / / / / / ! / t / / / A B D/ 500 C D 1,000 5% SALES TAX, NO EXEMPTIONS 8% SALES TAX, FOOD EXEMPT 8.5% SALES TAX, $200 PER CAPITA EXEMPTION 6% NORMAL RATE, INCOME TAX ! 2,000 I 5,000 IOPOO 500 MONEY INCOME C 1,000 2,000 5,000 lOpOO Please substitute these two pages for the two pages of statistics on Liquidity which u previously received. changes have been made.) (Some minor October 28, 1943. POSTWAR LIQUIDITY I. Ownership of U. S. Government Securities \J (In billions of dollars) Estimates June 30, June 30 1944 1945 June 30, 19a Total Interest-bearing Securities U. S. Government Agencies Federal Reserve Banks Commercial Banks Mutual Savings Banks Insurance Companies Other Investors Marketable Securities Nonmarketable Securities II. June 30, 1943 54.8 2.2 20.1 3.4 7.0 139.5 14.2 7.2 52.1 5.3 12.8 206.1 18.7 14.0 65.3 6.8 17.3 270.6 24.5 19.5 74.8 8.3 21.8 9.4 4.2 19.4 28.4 34.2 49.7 49.7 72.0 3.5 Total Money Supply i/ (In billions of dollars) June 30, 19a All Banks Deposits Demand 2/ Time Total Currency Outside Banks Total Money Supply June 30, 1943 June 30, 1944 June 30, 1945 37,317 27,879 65,196 55,952 30,328 86,280 ( 34,300) ( 37,300) (102,300 (113,300) 8,204 15,800 ( 19,800) ( 23,800) 73,400 102,080 (122,100) (137,100) ( 68,000) ( 76,000) l/ Purchases of U. S. securities by the commercial banks and the Federal Reserve System are estimated at $20 billion for the fiscal year 1944 and $15 billion for 1945. 2/ Excludes float, U. S. Government deposits, and interbank deposits. Ill Liquid Holdings of Individuals and Businesses i/ (In billions of dollars) Dec. 31, June 30, June 30, June 30, 1930 194-3 1944 1945 Businesses (except insurance) - total Demand deposits and currency Time deposits U. S. Government securities 15 Individuals - total Demand deposits and currencyTime deposits U. S. Government securities 44 10 1 1 26 8 53 52 1 (78) (103) 86 25 28 30 (117) (U71 20 1/ All figures are estimated. Businesses include both incorporated and unincorporated concerns. Estimates for 1944- and 1945 assume $55 billion borrowed each fiscal year from individuals, non-insurance businesses and banks. The resulting gross in liquid assets is allocated to businesses and to individuals, roughly,on the basis of the past yearfs experience. October 28, 1943 The Inventory Situation Inventories, except perhaps in the manufacture of war products, declined somewhat in the last half of 1942 and the first half of 1943, but in recent months seem to have increased a little. Inventories are still large compared with prewar levels, bat not large relative to the volume of sales. Data on Inventory 1/ (Billion dollars) Dec. 1939 June 1942 Dec. 1942 June 1943 Aug. 1943 Manufacturers' Total 10.7 17.2 17.7 17.2 17.6 5.1 5.6 4.5 1.9 4.3 9.0 8.2 7.9 4.3 5.0 9.7 8.0 8.3 4.8 4.6 9.8 7.4 8.1 4.8 4.3 9.9 7.7 8.2 4.9 4.4 Wholesale 3.5 4.6 4.0 3.9 3.9 Retail Total Department Stores Apparel Other 5.1 0.7 0.7 3.7 7.5 1.4 1.1 5.0 6.4 1.0 0.9 4.5 5.7 1.0 0.8 3.9 6.1 0.9 0.9 4.3 1, Durable Nondurable 2. Hair Materials In process Finished 1/ Department of Commerce, Bureau of Foreign and Domestic Commerce, REQUESTS FOR ADDITIGllAL TACTIC I I Date Treasury Presidential Request April I9I4I 3.5 March 19l*2 ( Request In billions of dollars 7.6 Sept. 19ii3 Date of new Legislation ) 3.6 Sept. 19J+1 7.0 Oct. 19k2 3.0 16.0 Jan. I9b3 Yield of new Legislation June 19l*3 10.5 Figures on internal revenue collections show increases of almost $6 billion from fiscal 1 1 - to fiscal 19l|2, and over 941 19^3« billion^ from fiscal 19^2 to fiscal Much of the increase was derived from a vastly broadened base of taxation rather than from the legislative incresses in rates. THE INFLATIONARY GAP The gross inflationary gap is the amount by which the income which people have left after taxes exceeds available goods and services at present prices* If this excess is saved, no net gap is left, and prices do not rise. Item 5 in Table A shows for the current fiscal year the excess of income that must be saved to avoid a price rise, that is, #40 billion. Table B shows the forms which these s avings might take. If a part of the excess is not saved but spent, prices will rise to balance available goods with money demand. Note that the whole wgap approach11 refers only to the use of current income and leaves out possible spending from accumulated funds. October 28, 1943 -"Strictly C onfident lal^- A* Use of Income Pay&ents bylndividuals * (Billion Dollars) 1942 Fiscal Tear 1945 1944 1. 2. Incooe Paraents to Individuals - Personal Taxes 102.8 5,7 129.9 9.9 150.0 20.0 5. 4. Disposable Income - Payaants to private industry 97.1 80.7 120*0 85.9 150.0 90.0 5. Personal Savings Savings as per cent of disposable income 16.4 16.9 54 «1 28.4 40.0 50.8 16 >4 54 JL 40 >0 Securities Savings and Loan Associations Private Insurance Liquidation of debt Total 6.2 .5 2.0 1.1 9.6 11,0 5*0 2.0 16-4 (18*0) ( *5) ( 3.1) ( 2.0) (25.6) B* Increase in currency and bank deposits held by individuals 12. G. Adjustment item Total 4.7 2 16.4 14.7 5*0 54.1 (15.0) ( M ) (40.0) B# Types of Personal Savings ** (Billion Dollars) Personal savings A* Applied Savings 7. 8* 9. 10. 11# Table A. * Figures far 1942 and 1945 U. S # Treasury Division of Research and Statistics. Figures for 1944 are estimated. Item One equals national income plus transfer payments minus corporate savings and employment taxes. (National income equals gross national product minus depreciation reserves and business taxes)• Item Two equals income tax, Victory Tax, estate tax, gift tax, and certain excise taxes. Item Four includes outlays on residential construction. Table B. ** Based on S.E.C. estimates for liquid savings. The estimates for 1944 are necessarily rough. Item Seven includes purchases of United States Government, State and local governments, as well as private securities. Item Eleven based on S.E.C. estimates and information obtained from Federal Reserve Deposit Survey. Item Twelve. If the statistics used in Table A and B were entirely comparable, the total of applied savings and increase in currency and deposit holdings should equal total personal savings• The figures do not check completely, partly because of conceptual differences and partly because of differences in statistical sources.
