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April 11, 1941.

My dear General:
en I had lunch with the President
on Wednesday l e asked s e to go over a tax memoi
randum whica he gave to me and let him know
what I thought about it. The enclosed letter
to him is in response to his request,
I will very match appreciate it If
you will see that he gets it as promptly ftfl
possible as he was desirous of taking it vith
hla to Wars Springs.

Sincerely yours,

General Edwin I« lataon,
The ihite House


April 11, 1941.

My dear We. President;
In respo&se to your request, I have goae over the Currie tax
memorandum which you gar© me. The memorandum herewith attached was
prepared in consultation with Dr. Currie, Dr. Hansen, and staff members.
I wish particularly to call attention to the main points stressed,
as follows:

Public Concern over Debt* Deficit and Inflation
A budget deficit of $13 billions, with existing tax system,
is indicated for fiscal year 1942. The public will beffiaehconcerned unless this gap is closed by a substantial amount. With respect to inflation* specific price control measures are of primary importance, but the
public will not be reassured without substantial tax increases,
2, War Profits aadfraborTrouble
Corporate profits in 1941 will rise rapidly. Unless these
profits (mainly incident to defense expenditures) are taxed away, labor
demands are alsost certain to get out of hand. Without an honest program
to take the profits out of war, we cannot hope for social and labor stability.
3. Progressive Taxes v. Sales Tax
Interested groups are pressing for a sales tax. If corporations are allowed large profits and sales taxes are imposed, inflassiatory
labor disturbamces will be fed frois two sources: (1) large corporate
profits, and (2) rising labor costs,

Corporate Profits plus Broadening of Income Tax
Excess defense profits mist bo taxed away. But this ia not
enough. Everyone above a basic miaiKum income snast contribute to defense,
Daly by broadening the income tax base and raising the normal rate can we
head off a regressive sales tax.

1*he proposals laade will yield about #2.5 billions additional
revenue for fiscal 1942. The memorandum also calls attention to the
prodigious yield of a strong excess profits tax when the national income
reaches |100 billions. It is not only the most equitable tax, but it is
also a great revenue producer.

The Honorable,
The President.3< the United States

The White Houf .
[ Louis
Federal Reserve Bank of St./ b

Respectfully yours,





April 11, 19iil
Excess Profits Tax - The present statute, falling far short of the intention stated in your laessage of July 1, 1S&0. "to see that a few do not gain from
th© sacrifices of the many11 In the task of arming for national defense, should be
drastically revised. Labor can not wall be asked to moderate its demands if employers are permitted to retain huge profits. After paying taxes reflecting increases already made and in prospect, many individuals will have less money left
than they had before th© defense program got under way, while corporate earnings
after taxes are sharply higher and many corporations are making more money than
they have ever made before. In contrast to individual earnings, these corporate
earnings escape the full force of the individual surtaxes because they may be retained without penalty* An effective excess profits tax is the best way to make
them bear their fair share of the tax load.
Specific Proposal - Fix the excess profits base at not more than 10
per cent or less than b per cent on invested capital, th© exact figure within
these limits to be determined by past earnings experience* BliFdnat® borrowed
capital fro® ta© statutory invested capital base. Retain the present specific
exemption of i5#000. On excess profits over this exemption, levy rates as

First $20,000
Between 120,000 & 1+5,000
Over 1^5,000

(Per cent)

Retain the provisions of the present law allowing personal service corporations
to escape excess profits tax if stockholders are taxed on their appropriate share
of corporate earnings under the individual income tax.
An alternative plan would b© to establish a uniform excess profits base
of 6 per cent return on invested capital, A tax rate of 10 per cent might be
applied to earnings between 6 and 7 P®*" cent of invested capital; a rate of 20
p^r cent to earnings between 7 and 8 -per oentj and the same seal© of graduation
continued until a rate of 100 per cent would aj*ply to earnings in excess of 15 per
cent on invested capital* A modification of this plan, beginning the rates at a
level somewhat higher than 10 per cent and fixing a maxiraum rate of sosa&what less
than 100 per cent, might meet the objections that the schedule of rates first
outlined would produce relatively large differences in taxes for corporations with
relatively small differences In earnings, that fiscal productiveness would be impaired
by a schedule taxing th© very large volume of earnings between 6 and 0 per cent on
invested capital at relatively low rates, and that a 100 per cent rate would deprive
business of any incentive for efficient management.
Koraal Corporation jncoae fax - Tim maximum rate of normal corporation
income tax should be increased irom 2I4. "to 30 P®** cent, a step generally anticipated and already reflected in corporate policy.
Personal Income Tax - • t i is the most equitable of all taxes and
should be made the backbone of our tax structure. Up to now, however, we have
failed to make as full use of th© personal income tax as other democratic countries
have don©, with the result that it yields only about 20 p&r cent of total Federal
revenue. Pressures on the Congressional Committees have resulted in an inccese
statute shot through with inconsistencies, inequities and iamunities for minority
groups of taxpayers*

Specific Proposal (a) Disallow the personal exemption and credit for dependents for purposes of surtax* Present practice amounts to granting a subsidy that increase*;
in value & income increases*
(b) Tax th© incomes of husbands and wive® as a single income. D©
privilege of filing separate returns i s a tax-avoidance device that in practice is
valuable only tG wealthy couples, and practically all wealthy oouplas m k use of
it* Professional services of a high ordor at the Government1 s disposal are adequate to remove th© legal obstacles to this proposal if th© use of those services
is not blocked by objectors whose opposition rests basically on political ooaservativism rather than on legal grounds*
(c) Lower the surtax exemption to #3#000 and increase surtax rates.
(d) Increase the normal tax rate from k to 8 per cent* ! h comparable
British rate is now 32 \/2 $®r cent* Lower personal exemptions for married persons
from |2,000 to |1#60O* Ihis exemption should not logically be ©ore than double
the present exemption for single persons of I&OC. Recognizing all the disadvantages
of shxuply increasing taxes on large muabars of comparatively low-income citizens,
i t now seems imperative to increase the number of citizens participating by the
payaent of direct taxes in the financing of the defense program.
Estate and Gift Taxes - O June 19, 1935* you said "The transmission
from generation to generation of vast fortunes by will, inheritance or gift, is
not consistent with th© ideals and sentisaents of the American peoplo. Such
inherited economic power i s as inconsistent with th© ideals of this generation
as inherited political poiarer was inconsistent with th© Ideals of the generation
which established our government*w the task of bringing l«r into conformity with
popular ideals, begun in the Revenue Act of 1935* ought to be finished now*
1. Establish a single schedule of rates applicable to th© cumulative
total of gifts during life plus estate passing at death. Under present practice,
gifts subject to tax in the lowest brackets of the gift tax can be used as a ae&ns
of avoiding taxes in the highest brackets of th© estate tax. Great accumulation®
of wealth can be transmitted by gift as well as by bequest, and a consistent
public policy would tax both types of transfer at the same effective rates. But
if i t were thought desirable to leave an incentive for the making of g i f t s , the
total tax assessed on a gift might be arbitrarily reduced by ten per cent from
the tax assessed on a transfer of the saoo amount made at death, " aise the now
unduly low rates applicable to estates under 110 million*
2, For the present exemptions of |!$,000 under the gift tax, il+0,000
general under the estate tax,, and §140,000 insurance under the estate tax — a
total of 1X20,000 — substitute a single exemption of $25#OOO, applicable to
insurance proceeds or property in any other form.
3* Limit the right to make tax-exeapt gifts and bequests to educational
and charitable institutions either by limiting th© amount of such transfers or by
requiring the gift or bequest to be certified as truly in the public interest
by qualified expert opinion. Such transfers often nerely reflect the whiss of
the donor and serr© no useful public purpose*
!*• Broaden the legal concept of "gifts* and "transfer at death'1 to
include a l l transfers of property that transmit wealth from one generation to
the next*


Revenue Yield - The yield of these proposals in the calendar year 1942
may be roughly estimated as follows?
(Millions of dollars)
1. Excess profits tax revisions
8. Normal corporation tax
3. Individual income tax: 1/
(a) Disallow credits against surtax
(b) Tax incomes of couples as single income
(c) Rats© surtax rates and lower exemption
(d) Raise noms.1 tax rates and lower exemptions
4, Estate and gift tax Z/
With a national income of |100 billion, the proposed changes in the
excess profits tax would result in an addition of |l,750 to the yield of the
present law or a total revenue from excess profits tax of #3,500 million.


In the estimates of individual income tax yields, full account has been
taken of tho effect of increased corporate taxation on dividends.


Because of the long lag in collections, no appreciable yield is to be
expected in calendar 1942, but about $500 in revenue would be
realized in 1943 and subsequent years.