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September 7, 1943 Dear handolph: I am enclosing a brief statement which will explain why I think It undesirable to advance the proposal for an expansion of Social Security &s a part of the iidadjiistr&tion#s currant revenue program* My maim concern is that a linking of these is sue a would weaken the prospects for obtaining & satisfactory revenue bill and would cause considerable delay in providing for increased Uotes. The major t&slc before Congress is to provide promptly for & subst^ti&l amount of additional revenue needed to assure the success of the stabilisation program* If the Social Security proposal nere introduced && a p*a*t of the revenue program* this basic issue would be lost sight of* The public, itoich has come to understand the need for increased taxes as a maans of inflation control, would find it more difficult to see how nn expansion of the Social Security program at this time nouid serve the same purpose. Congresa h&s show no eagerness to tackle the Social security issue now, as evidenced by the reception given the President1s recent statements on the subject. Introdtaction of the Social Security issue would raise hi|$tly controversial problems which have no relation to the imLiedi^te needs of the situation* Opposition to specific Social Security provisions would be turned into opposition to any substantial Increase in tuxes. For all of these reasons it would appear a serious tactical error to link the Social Security pro— gram with th® currant revenue proposal* At ihe same time an increase in payroll tajtes earmarked for Social Security benefits would offer no advantages* for purposes of currant policy, vitich could not be obtained as well by other methods* in increase in income taxes, if co^ined with a provision for tax refunds after the war would provide an equally effective means of relieving the burden upon taxpayers in tiie lower incoae groups* the reduction in voluntary pureb&ses of Sc-vings bu&dsf resulting from a sh^rp increase in payroll taxesf would be no less, and perhaps more severe than ttu.t resulting from an increase in income taxes, combined with a refund provision. In some other respects tli© economic effects of increased income taxes combined with post-war refunds would be preferable to those of increased payroll taxes* ttiese considerations, ^lich speak &pdnst a combination of the Social Security proposal with the current revenue program, raise no objection against &n expansion of the Social Security program at a later time* Gn the contrary, I believe th*t every effort should be m&de to -obtain Con* gression&l action on an enlarged Social Security program after a substantial revenue measure has been passed. II such action is obtained in the course of If44, increased benefits i&ll become available in time to meet tile needs ishich may arise in the period of transition to a peacetime econ~ oisy* m increase in taxes now should not Jeopardise Hie case for an expansion of the Social Security program next year* Additional taxes now imposed can be reduced later nhen the higher payroll taxes become effective* Sincerely yours, M* $• Iccles, Enclosure Honorable Randolph S» Paul, G^ieral Counsel* Treasury Department, Strictly Confidential Place of Social Security in the Administrations Rev«me of the Social Security program in highly desirable, but it tould be a s&stake to link the drive for a broadened program with the administration1s current revenue proposal* If u broadened Social Security Program were m^Ae the central part of the Administrations revenme proposal, the basic issue of inflation control would be lost sight of in the discussion of social inmir&iic** MM a result the adoption of a revenue bill would be delayed. More important, the chances of obtaining the revenue objective would be greatly reduced. The public, nhich has been brought to understand the need for increased taxes as a means of inflation control, mould find it more difficult to see how an expansion of the Social Security program umild serve the same pnrpo$e« Congress, on the ufaole, has aitowi no eagerness to tackle the Social Security issue at this time, as evidenced by the reception given to the President *s recent statements on the subject. If the Social Security issue is introduced, highly controversial matters aueh as medical insurance or the lifting of State unemployment insurance to a Federal basis would have to be considered. Issues would be debated i&ich are entirely unrelated to the ixaaedi&te needs of the situation* Groups itiich are opposed to specific Social Security provisions noulcl be placed into opposition against any substantial increase in taxes. For all of these reasons, it would appear a serious tactical error to link the Social Security program with the current revenue proposal, m increase in payroll taxes earmarked for Social Security benefit s, noreover, would offer no advantages, with respect to current policyf «tilch could not also be obtained by other methods. The granting of addi~ tional Social Security benefits would be one way of relieving the burden of additional taxes upon the lower income groups* the granting of po&t^war tax refunds mould be an equally effective method* Under any approach a sharp increase in the tax liability of the lower to aiddle income groups will be inevitable if |8 tofLO billion of additional taxes are to be obtained from individuals• but the actual burden imposed on these taxpayers could be lauch reduced if a subst ntial p^rt of their contribution were nu.de in the form of refundable taxes# A simple percentage schedule eould be provided by ifcich the refundable part of the tax would be determined. If the additional tax revenue were obtained from a supplementary war tax rather than an increase in the rates of the existing surtax schedule, the refund schedule might be applied against the liability under the *uppleaientary tax (otherwise it might be applied ag&inat the increased regular income tax}* Of the first 150 of supplementary war tax paid* 100 per cent mi^tt be refundable; of the nesti $50 paid, 70 per cent* and so forth at a declining ratet with an tipper liait for rafuad© of $1,000. &® ^ result Uim refundable portion of the taxpayer1 s liability would be the mailer the larger hia income and the bulk of the refunds would go to the lower income groups* The sehedol* could be ad* justed to provide for any desired breakdown of the additional liability between outright and refundable taxes• In this way taxpayer© In the lower income groups would ba given assets in return for their tax payment* in much the sm® way urn under an exp«snded Social Secwity program* -Asubst&nti&l increase in compulsory requirements on the lower to middle income groups would be reflected in reduced purenuses of savings bond* on a voluntary basis* im increase in payroll t&nes for Social Security purposes would &i*ve tftis effect no less t&an i*n increase in income taxes with a provision for refunds* Both methods would cut down the taxpayer's income out of which satririgs bond© could be purchased and would provide him with assets which lieffiightsubstitute for the bonds heretofore bou^t on a volunt&ry basis* the fact that increased ^Social Security contributions would apply dguinst total gross income (excluaing the part of income in excess of $3*000} and allow no exemptions to even trie lowest income groups suggest* that the resulting reduction in the payroll contribution program might be larger under a 12 per cent payroll tax than under a system of refundable in~ taxes which would provide for personal exemptions and credits* toy substantial revenue program, will tend to redkice voluntary purchases of savings bonds* but this is no decisive argument against it* It is of vital import cjice that the Government should ret .in some measure of control over the timing of redemption payments in the pocWwar period* Such control is retained under * compulsory program (be it in the form of refundable taxes or expanded Social Security benefits)toutis absent under & voluntary savings program* Voluntary Purchases of savings bonds, nevertheless* will retain a vital p^rt in the financing program even toou# taxes are increased. In certain respects &n increase in payroll taxes would be less satisfactory in the current situation th&& an increase in income tmxset p^rt of whidi would b© refundable* Ute proposed payiroll tax of 12 par coat would b# shared in eqpal pirts by employers md enployees* fhms the contribution by employers would be increased from their present level of A per cent to 6 per cent and the contribution by employees would go up tram. 1 par cent to 6 pBT cent* A 2-point increase in the contribution by employers would, in fact* increase their labor cost by 2 per cent. In many instances this might require m adjustment of price ceilings* fhere would be no increase in production cost if the additional revenue were obtained in the form of income taxes* collected from the individual taxpayer* A 5-^oint increase in the contribution by employees would tend to create more hardship in the lowest income groups than would refundable income taxes rchich would allow for personal exemptions and credits* Therefore it would be aore likely to result in a demand for wage adjustments* A broadening of Social Security coverage to agricultural workers and to self~e©ployedf could hardly be accomplished on short notice, thereby lengthening the lag between enactment and administrative application* In short, it would appear that the inclusion of the Social rity program in the present revenue proposal would lower the chances of obtaining a satisfactory bill without offering advantages «hich could not be obtained otherwise* But this conclusion in no way reduces the desirability of promoting an expansion or the Social Security progr^ja at an early date. If Congressional action on a broadened Social Security Program were obtained in 1944 the increased benefits would become available in time to meet the emergency needs arising in the po$t~*mr readjustment period. An increase in income taxes now would provide no obstacle to a broadening of the Social Security Prograa in 1944* Mather it would f&cilit^te thia step since existing taxes could be red&ced later on, irfien the higher payroll taxes go into effect. The development of the Social ^eenrity Program is of vital portancs to the nation* It should be considered and adopted oa its 01m merits* Study of the program, would require More time, mz&t likelys th&n would be available to Congress now if new taxes are to become ©ffactive by January 1, 1944* Tb@ relation^iip betwe^i the financing of Social £ecui»ity and the requireaimts of general fiscal policy ae©d be conaideradt most carefully* It appear© v^ry doubtful latotether the finmiciiig of the ©nl&rged pro* gram should even at the outset, rely exclusively upon payroll taxes and not be giirea aomm support fnm the genaral budget. Payroll taxea aa hi^k as 12 p#r cesat misfit prove a severely depresaing factor in th@ post^nar ecouoaqr9 iiii^her the burden were shifted to the ataployeeis iri the f o m of loner Hcige* or to the conmimers in the form of higher prices*. This point should be weighed carefully before adapting a 12 per cant payroll tax which isould promise to become a rigid element in tlie postwar Federal tax structure* September 6, 1943
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