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or T H E


C o r r e s p o n d e n c e


Chairman Eccles


Date ™ y 22,

Emile Despres


There are attached hereto (1) a memorandum by Mr, Krost
setting forth a number of proposed tax changes, with yield estimates,
as well as estimates of the yield of existing taxes, at various levels
of national income; (2) a memorandum by Professor Hansen stating his
views regarding tax increases; and (3) a copy of a letter received
this morning from Mr. Randolph Paul, Mr. Solomon is preparing a
summary of the proposals referred to by number in Mr. Paul's letter.
The proposals described in Mr. Krost1 s memorandum were
selected because (l) they will raise additional revenue without causing
an equivalent reduction in consumer outlays, and (2) if put forward by
the Administration, they are believed to have a reasonable chance of
enactment at this time. A tax program of this sort runs the danger
that it may lead taxpayers to make more intensive use of the loopholes
left unclosed. Of the tax avoidance devices not covered by these
proposals, the most important is the practice of leaving corporate
earnings undistributed in order to avoid high surtaxes on individual
Even nonconsumption taxes of the type put forward by Mr. Krost
are bound to be somewhat deflationary. One-third of all dividends
reported for individual income tax purposes were received by those having
incomes below #10,000 a year.
In my judgment an adequate and practicable tax program at
this time would consist of (l) an excess profits tax, (2) elimination
of the privilege of filing separate returns for husband and wife, and
(3) removal of tax exemption for future issues of Federal, State, and
local securities. At present levels of income the first two measures
would yield about #800 million of revenue, and at least double this
amount at a #100 billion national income. We estimate that our existing
tax structure, including both budgetary receipts and net social security
fxrnds, will provide #7.4 billion of revenue at the present national
income and #17.1 billion at a #100 billion national income. A tax
program which goes much beyond the three measures listed above runs the
danger of seriously retarding the general expansion of income and employment which the arms program is expected to produce.

Chairman Iccles


July 22, 1940

Defense expenditure in the present fiscal year is being
tentatively placed at #3.5 to $4 billion. By using material presented
before Congressional committees we have estimated that the nonrecurrent
costs of expanding our national defenses as provided in legislation
passed or now pending will be about #15 billion, to be spread over a
number of years. This figure includes a tripling of our present naval
tonnage, an air force of 35,000 planes with facilities for annual production of 50,000, and full equipment for an army of 2,000,000 men. The
recurrent cost of maintaining our armed strength at this level would be
about #5 1/2 billion. In the light of these figures, it seems improbable,
leaving aside the possibility of our becoming a belligerent, that defense
outlays will exceed #7 or #8 billion a year even during the period of
armament expansion. Under these circumstances, it seems appropriate to
postpone drastic increases even in nonconsumption taxes until a substantial amount of general economic expansion has been achieved.

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