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Says Marriner S. Eccles
Chaiman of the Board of Governors
of the Federal Reserve System
THE SHEER SIZE of the war-financing program which faces the
Government of the United States frightens many* The feeling prevails
that inflation is unavoidable.
The problem is not one of raising the money. The problem
is getting the money in such a way that the inflationary dangers are
minimized, that the greatest amount of stability that it is possible
to create under these conditions should be created. That safeguard
is essential for the maintenance of morale.
Today the supreme objective of the financial policy of the
Government, however, is not the avoidance of inflation but rather
the maximization of war production. Nevertheless, we can achieve both
if we are ready to make the sacrifices about which we have heard and
talfced so much. Lowering the personal income tax exemption would be
one sound step in that direction.
One year ago the United States was spending 150 million dollars
a month on defense production. Today we Americans are spending 150
million dollars every three days. In 19h3 we shall be spending 150
million dollars every day. This process holds great inflationary possi­
bilities — unless we can divertthe people’s income from consumer goods,
which we can no longer produce in quantities, to the Federal Treasury’
war needs.
We can do that. We can meet the huge War Budget and at the
same time cause that desired diversion of frustrated buying power by
(l) increasing taxes, and (2) by increasing purchases of Government bonds
and defense securities from idle business capital and current savings.
national income of
fourth that amount
income of about 80

the coming fiscal year, l9U2-k3»
may expect a
about 110 billion dollars. Collection of about one— 28 billions — in taxes would leave a spendable
to 85 billion dollars for the American people.

Such an income would make available 15 to 20 billions of savings
which normally would be invested in industry, housing, and other activi­
ties curtailed "for the duration*1. That money can be borrowed for the
war program. It is expected that approximately the same amount also can
be borrowed from savings already accumulated in banks and elsewhere.
But let us consider more specifically taxation as a source of

- 2 -

The war budfeet for 191+2-U3 calls for tax receipts of 28
billion dollars. Of that sum, existing taxes will bring in about 19
billions. This means that, in accordance with the Presidents program,
we must collect about 9 billions through additional other taxes. The
proposal is to collect 2 billions of it from Social Security and the
remaining 7 billions from new additional taxes.
How shall we raise those 7 billions?
Corporation taxes, it is clear, will have to be substantially
higher than at present. Excess profit taxes will likewise have to be
increased. It would seem to me to indicate that excess profits will
be almost a thing of the past, and I do not know why this should not be
the case.
I am unalterably opposed to a general sales tax, for this form
of taxation is in no wise based on an equitable principle of ability
to pay. It is a retrogressive rather than a progressive tax.
With the personal income tax, however, we have had almost 30
years experience. We know it to be a fair tax, taxing those who can
best afford to pay and exempting those with the least ability to pay.
Now, with America engaged in an "all out* battle for its very freedom
we shall have to lower the $1,500 exemption allowed for married persons
to $1,
200, and the exemption for single persons from the present $750
to $600. At the same time, the fl+OO now allowed as deduction for each
dependent should be lowered. It may be necessary also moderatly to in­
crease the rates on medium incomes.
The practical job of collecting income taxes seems to me to
call for a withholding tax. Certainly where so many people will be
subject to income tax as is now the case, a withholding tax at the
source would greatly lessen not only the expense of collecting the tax
but it would collect the tax at the time the income was received and
would avoid the recipients of that income spending the funds only to
find a year later when the tax was due that they didnf have the funds.
It is essential, it seems to me, to have a withholding tax in order
that the inflationary effect of the government expenditures would be
reduced by avoiding the lag between the expenditure and the time the
taxes are paid.
That incomes be increased to keep abreast of rising prices
is a fallacious proposal. It would require none of the sacrifices
about which we talk so much, even if it could be done. But instead it
is the way to inflation for it would be increasing purchasing power out
of proportion to the increase in the supply of goods. It has been our
unused manpower and production facilities which have prevented inflation
of prices thus far, but the defense program will not leave any unused
workers or production facilities.

- 3 Some may underestimate the American people. I see them eager
for action, ready for any sacrifice. The surest way they can get action
is to pay for it -- and the American public shows a tremendous dis­
position to do that quickly and without stint.
Occasionally we hear the wail that taxes may rise so high they
will rob business of all incentive to produce. I have no sympathy for
any such point of view.
If this war is going to be fought on the basis of what we are
going to get out of it instead of what we are going to put into it, we
are going to lose. If the only interest of labor is greater wages,
if the only interest of business is higher profits, if the only interest
of the farmer is higher prices, then we have many tears and much blood
to shed.
If the Russians had been fighting for the profit motive in­
stead of their country and homes, I do not believe that they would have
had the morale to fight as they have. I hope the businessmen of the
United States will set an example to the farmers and laborers and will
no longer talk of the profit motive as necessary in order for them to
put forth their best efforts and to do their parts. If that is going
to be the guiding influence in the determination of what we are going
to produce, then we have already lost the battle.
Businessmen who have the most at stake must do the most#
They must not expect to pass on the burden to someone else who is less
able to bear it and who has far less to lose than we have#