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BOARD DF GOVERNORS FEDERAL RESERVE SYSTEM ^Office C o r r e s p o n d e n c e To Chairman E c c l e s Frnm R. A. Musgrave pate Subject; October a, 1943. Summary o f T r e a s u r y Tax Program. The total annual yield of the program is estimated at 10*56 billion dollars, that is 1.5 billion dollars below the previously announced Treasury objective. The additional revenue is to be derived from these sources: In billion dollars Individual income tax Corporation net income tax Estate and gift taxes Excise taxes 6.53 1.14 .40 2.49 Individual income tax (1) For the year 1943, the victory tax is to be changed so that only the net tax is retained. Effective January 1, 1944, the victory tax is to be repealed entirely. This would involve a net loss of 3.3 billion dollars. (2) Income tax exemptions for married taxpayers are lowered from $1,200 to §1,100 and the credit for dependents is lowered from $350 to $300. The earned income credit is repealed. The normal rate is unchanged but surtax rates are increased throughout the scale. (A chart showing present and proposed effective rates is attached.) AMOUNT OF INDIVIDUAL INCOME TAX UNDER PRESENT LAW AND PROPOSAL (Married taxpayer with no dependents) Net income before personal exemptions Present tax Proposed tax #1,000 1,500 2,000 3,000 5,000 10,000 20,000 50,000 100,000 $15 79 188 405 894 2,467 7,100 27,075 68,584 $108 255 594 1,409 3,885 10,356 35,571 82,005 On a full-year basis, the proposed rates would yield 23*9 billion dollars or 9.8 billion more than the present law. The loss of 3.3 billion dollars from the repeal of the net victory tax reduces the gain to 6.5 billion dollars. (3) No definite recommendation is made with respect to postwar refunds* However, two possible refund schedules are submitted for consideration, providing respectively for the refund of one-third and one-half of the additional income tax yield* Both provide for a 50 per cent refund for the first $50 of tax and both set an upper limit to the amount of refund per taxpayer* If Congress should provide for refunds, it is recommended that the taxpayer be permitted later on to purchase a fully paid-up life insurance policy with his refund credit* (4) No definite recommendation is made with respect to relief for fixed income groups* However, it is recommended that taxpayers whose incomes failed to increase should be forgiven all or part of the refundable tax* (5) The withholding system is to be extended to collect at the source a larger portion of taxes in the middle income groups* As a result, fewer taxpayers will have to file estimated returns* No recommendation is made for reducing the number of taxpayers who have to file final returns* Corporation income taxes An increase in surtax rates under the Corporation Income Tax is recommended, raising the combined normal and surtax rates to the following level: Net Income Not over $25,000 Over 50,000 Present rates Proposed rates 25-29$ 40$ 29-33$ 50$ This increase in rates is estimated to yield an additional 1*1 billion dollars* Ho recommendations are made regarding the treatment of postwar reserves* Excise taxes The proposed increases in excise taxes are estimated to yield 2*5 billion dollars* Of this, over 1 billion is to be derived from increased taxes on alcoholic beverages and tobacco* Other isqportant increases are in the taxes upon admissions, transportation of persons (25$ of charge) and jewelry* Sizeable new taxes are recommended on soft drinks, candy, and chewing gum* Estate and gift taxes The Treasury proposes a reduction in estate tax exemptions from $60,000 to $40, 000 and a sharp increase in estate tax rates* Gift tax rates are to be raised to three-fourths of the new and higher estate tax rates* The increase in yield from both sources is estimated at 400 million dollars* Social Security program The Secretary recoimaended f1 enthus ias ti c al ly» that the Social Security program be extended^ If this recommendation were followed, and payroll taxes on employees were raised substantially, the income tax rates here proposed should be reduced for the lower income groups# ft.fr.W. Attachment
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