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Form F. R. 131 BOARD DF GOVERNORS FEDERAL RESERVE SYSTEM Office Correspondence Chairman Eccles Frnm Dat e October 2 9 , 1 9 1 a Subject; S o c i a l S e c u r i t y Developments Martin Krost This morning's New York Times c a r r i e s a s t o r y that the Treasury has recommended an i n c r e a s e i n the S o c i a l S e c u r i t y taxes t o the White House. Proposals t o t a x stock dividends and t o t a x undistributed p r o f i t s as a part o f i n d i v i d u a l income are also mentioned as being under a c t i v e c o n s i d e r a t i o n at the Treasury, I am informed by the Treasury's D i v i s i o n o f Tax Research that these r e p o r t s are i n a c c u r a t e . Treasury p o l i c y vdth r e s p e c t t o the increase i n S o c i a l Security t a x e s has not y e t been formulated. We Yd 11 be informed b e f o r e the Treasury maizes any s p e c i f i c proposal on the matter t o the P r e s i d e n t . A f t e r the conference at the Yihite House s e v e r a l weeks ago, the Treasury and Bureau o f the Budget were asked t o study and r e p o r t on the recommendations submitted by the S o c i a l S e c u r i t y Board at t h a t time. Ho interdepartmental committee was appointed t o consider the m a t t e r . Apparently n e i t h e r the D i r e c t o r o f the Budget nor the Secretary o f the Treasury have come t o any f i n a l conclusion on these recommendations. General f e e l i n g among the Treasury s t a f f seems t o be t h a t w h i l e the increased p a y r o l l taxes are h i g h l y d e s i r a b l e as an a n t i - i n f l a t i o n a r y measure, the proposals f o r increased b e n e f i t s made by the S e c u r i t y Board are unwise both because they i n v o l v e an immediate i n c r e a s e i n Treasury expenditures and because they may i n v o l v e the Treasury i n f u t u r e o b l i g a t i o n s o f v e r y l a r g e magnitude* Since these increased expenditures would take the form o f unemployment insurance payments, d i s a b i l i t y and h o s p i t a l i z a t i o n b e n e f i t s , increased Federal grants t o the States f o r old-age a s s i s t a n c e , and a new Federal grant t o States and l o c a l i t i e s t o pay part o f the costs o f d i r e c t relief j would seem that from the point o f v i e w o f post-war readjustment problems and the longer run future we should f a v o r these changes f o r about the same reason that the Treasury i s i n c l i n e d t o oppose them, namely, that they i n v o l v e a s u b s t a n t i a l long run increase i n s o c i a l expenditure. I n considering the linkage between increased taxes and increased b e n e f i t s i t should be kept i n mind t h a t the S e c u r i t y Board f e l t some concern about the p o p u l a r i t y o f the S o c i a l S e c u r i t y System as a whole and was r e l u c t a n t t o propose an increase i n p a y r o l l taxes p u r e l y as an a n t i i n f l a t i o n a r y measure without making some i n c r e a s e i n b e n e f i t s as a j u s t i f i c a t i o n f o r the increased t a x e s . The net e f f e c t o f the changes would be t o increa.se the net r e c e i p t s a t t r i b u t a b l e t o the S o c i a l S e c u r i t y System as a whole by about |1 b i l l i o n a y e a r . To: _o — — Chairman Eccles Recommendations as t o taxes Present rates Old-age insurance taxes Paid by employer Paid by employee Unemployment insurance Paid by employer Paid by employee Sickness b e n e f i t s Paid by employee Total Proposed rates 1 1 2 2 3 0 5 l 0 2 5 10 I t i s also recommended that the taxes under old age insurance should cover the important groups now l e f t out o f the System, namely, a g r i c u l t u r a l l a b o r e r s , domestic servants, employees o f n o n - p r o f i t organizations, farm operators and other self-employed persons, and government employees. Under the unemployment insurance system i t i s proposed t o extend coverage t o employees and establishments having l e s s than e i g h t workers. The gross increase i n ta;x: c o l l e c t i o n s i n the calendar year 19^2 would be about |2 b i l l i o n . The increase i n the unemployment insurance tax would not go i n t o e f f e c t u n t i l the beginning o f 19^4-3 ^ ^ would increase c o l l e c t i o n s by an additional $700 m i l l i o n . Recommended b e n e f i t s There would be added t o the present old-age insurance system p r o v i s i o n f o r b e n e f i t s t o be paid i n the event of permanent and t o t a l d i s a b i l i t y before retirement age. These b e n e f i t s l i k e the e x i s t i n g b e n e f i t s under old age insurance would be drawn as a matter o f r i g h t and would not be dependent upon a means t e s t . The unemployment insurance system would be converted from i t s present basis of mixed Federal-State administration to a wholly Federalized system. Benefits would be increased, the waiting period would be shortened and the length of the period during which b e n e f i t s are paid increased. These changes seem p a r t i c u l a r l y important i n view of the l a r g e volume o f unemployment due t o the operations of p r i o r i t i e s that may develop i n the immediate f u t u r e . A new system o f b e n e f i t s f o r l o s s of wages a t t r i b u t a b l e t o temporary d i s a b i l i t y and payment of h o s p i t a l i z a t i o n expense i s proposed. These new b e n e f i t s are to be covered by the new 2 per cent t a x . I n the f i e l d o f grants t o States f o r old-age b e n e f i t s , payments t o the b l i n d , and f o r the support o f dependent children, the present basis under which the Federal Government matches State funds on a 50-50 basis i s t o be replaced by a v a r i a b l e system under which the Federal Government w i l l pay a higher proportion of the cost o f such payments i n States with To: Chairman Eccles low income and f i s c a l resources. The conditions under which these payments are granted are also t o be l i b e r a l i z e d , A new type o f Federal grant i s to be made t o share the cost o f providing general r e l i e f with States and localities. This represents adeparture from the p o l i c y l a i d down by the President i n 193^ under which the Federal Government was t o take responsib i l i t y f o r r e l i e f t o "employables" and the States and l o c a l governments were t o take care of the n unemployables n . As the system a c t u a l l y developed the Federal Work programs never employed more than h a l f of the unemployed and a good many employable persons were always on l o c a l r e l i e f r o l l s . The discrepancy between the p o s i t i o n of those able t o get "WPA jobs and those f o r c e d t o depend upon l o c a l r e l i e f has been responsible f o r a considerable volume of c r i t i c i s m o f the Administration p o l i c y from social workers and others f a m i l i a r with the r e l i e f s i t u a t i o n at f i r s t hand.
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