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BOARD • F GOVERNORS

KCorrespondence

OF THE

FEDERAL RESERVE SYSTEM

Chairman Eccles
Frnm

Mr. Thurston




Date February 2,19112.
Subject: "Income vs. Sales Taxation as an
Anti-Inflationary Control11, by Simeon
Et Lelfind

Leland, in the attached paper, does not differ with
you on tax principles. He recognizes, as you do, the place
of selective excise taxes. He also recognizes the inequity
of general sales taxes. But he points out the short lag in
collecting sales taxes, recognizing, however, that a payroll
tax or income tax withheld at the source would have the least
lag of all.
He says that in a sharp inflation quick collection
of sales taxes would be very helpful. As prices increased,
the yield from ad valorem sales taxes would automatically increase and the Government would have additional funds with
which to meet rising costs. He also makes the important
point that sales taxes would probably add fuel to the fire
for increased wage demands. Then he shows that the coverage
of sales taxes is unquestionably broader than that expected
from income taxes. In other words, the sales tax reaches
those below exemption limits, notably the farmers who, he
says, are pretty generally beyond the reach of income taxes.
He shows, however, that a general sales tax would
have to tax food and other basic necessities if it is to be
effective, and adds, "It is revolting to advocate such taxation when living standards for the masses are so low.11
But he assumes that Congress will be unwilling to lower the
exemptions to the extent that you and he advocate or to put
up the rates on the lower groups, and says, "Although the
consequences of regressive taxation are harsh, they are as
nothing compared with the burdens indiscriminately scattered
by inflation." He concludes that "as a tax restricted to
booms and times of inflation there is a place for it (sales
tax) in the tax system."
You might note his conclusion beginning on page 32•
Otherwise, I do not think you need to read this paper although
it is a thoughtful and able one and well worth keeping in your
speech file for possible future reference.

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