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F r F. R. 1 1 om 3 BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM ^ Q f f i c e C o r r e s p o n d e n c e To Mr. Despres Pram Mr. Jaszi Q J . Date June 27, 1&1 Subject; The British Forced Savings Scheme A forced savings scheme was introduced i n Great Britain as a part of the Budget f o r The scheme applies to two classes of taxpayers: those subject to excess p r o f i t s tax and those subject to individual income tax. 20 per cent of excess p r o f i t s tax l i a b i l i t y i s t o be set aside as a postwar credit; and individual income taxpayers m i l be credited with an amount equal to that part of their increased income tax l i a b i l i t y under the new budget which i s due to the lowering of exemptions and of the earned i n come c r e d i t , A ceiling of h 65 i s imposed on the postwar credit that can be accumulated by an individual income taxpayer. The credit with respect t o excess p r o f i t s tax l i a b i l i t y i s a concession to those who argued that the 100 per cent excess p r o f i t s tax now in force i n Great Britain destroys a l l incentive for the e f f i c i e n t conduct of business. The 100 per cent tax rate i s retained, but businesses may now have an incentive to operate e f f i c i e n t l y , because this w i l l add to their postwar c r e d i t . The scheme w i l l also ease the financial problems of postwar reconstruction by putting funds into the hands of businesses at that time. "With regard t o individual income taxpayers, the must have been to make more palatable the increase of the the 2,000,000 persons who, under the new tax laws, become tax f o r the f i r s t time, and to other low income taxpayers i s sharply increased. main motivation tax burden to l i a b l e to income whose tax burden The thought that the spending of these credits w i l l mitigate the postwar slump was also a consideration in establishing the scheme. But the h 65 ceiling provision and the particular formula used f o r determining forced savings indicate that, so far at l e a s t , there i s no serious intention to build up a substantial amount of forced savings. The maximum figure \vhich a married taxpayer without dependents w i l l save under the scheme i s less than 7 Ver income. This percentage declines rapidly f o r larger incomes. I t i s estimated that about L 125 million w i l l be accumulated as post war credits of individuals i n the f i r s t f u l l year of operation of the scheme. The annual postwar credit of businesses may amount to another £ 50 m i l l i o n . These are moderate sums as compared with the scale of t o t a l 3 government financing, and unless the scheme i s considerably expanded the repayment of credits after the war should not give rise to serious financ i a l problems. The manner of repayment has not yet been decided upon.