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(Sent to Secretary o ' the Treasury Vinson 10/20/4-5)

The main reasons for high wartime taxes, including the excess profits
tax, were (l) to hold down the deficit and the need for borrowing partic­
ularly from the banking system, (2) to reduce inflationary pressures at a
time of greatly excessive demands for goods and services relative to sup­
ply, and (3) to curb profiteering out of the war.
These underlying reasons for maintaining high taxes apply with equal
or even greater force during the critical period of reconversion, because
(1) we still face a heavily unbalanced budget* every dollar of Government
expenditures not raised by taxes will have to be borrowed, and to the ex­
tent that banks furnish these funds new supplies of money will be added to
the already enormous accumulations of liquid funds in the hands of the pub­
lic as a result of war financing; (2) demands, both domestic and foreign,
upon our economy are and will continue for an indefinite period to be
greatly in excess of supply* and (3) the profits to be made in the next .
year, at least, will be a direct result of war expenditures and thus just
as much war profits as if they wer?' derived naiile hostilities were still in
Taxation is the last real bulwark against inflationary forces because
of the weakening or removal of other controls, such as the fear Labor Board
exercised over wages and hence prices, or such as the isPB exercised in the
construction field. Hie most prudent course at this juncture would be to
defer tax reductions until such time as supply is more nearly in balance
with demand and we have begun to approach a balanced budget. At this stage
we would be wise to err on the side of too much rather than too little re­
venue — can always be reduced.
To the extent that any taxes are reduced at this time, it means add­
ing just that much more to the public debt, which is already approaching
300 billion dollars. Our first obligation is to protect Government credit
and the billions upon billions invested in Government bonds and other sav­
ings. Unless the deficit can be overcome now that the war is over and
mand continues to exceed supply, the question inevitably arises as to when,
if ever, the budget can be balanced.
Since the basic problem today is one of shortages of goods in rela­
tion to demand and purchasing power, prudent fiscal policy requires that
high taxes be maintained in order to reduce the deficit so far as possible.
Hot only is the backlog of de.and unprecedented, but the supply of money in
the hand» of prospective customers is at an all time high and will be further
increased as reconversion and employment in peacetime occupations occurs.
The situation would be entirely different if we were confronted with a pro­
gressive deflation and inventories were in excess of effective demand. Then,
the problem would be to create more demand for goods and to give employment,
and fiscal policy would call for first reducing taxes on the lower incomes.
If any taxes are to be reduced now, however, reductions should not go
first to those best able to pay, but to those least able to pay. So far as
individual taxpayers are concerned, this can be accomplished by removing

the 3 per cent normal tax on individual incomes, as proposed by the Treas­
ury. It is estimated that this entails a loss of revenue of about 2 billion
dollars. This will remove from the tax rolls about 12 million taxpayers
in the lower income groups, fcft l it will benefit primarily the lowest
groups, it will apply to all income taxpayers.
Similarly, if corporate taxation is also to be reduced, the benefits
should go primarily to concerns which are not the oiost profitable, and this,
in turn, would be accomplished by reducing surtax rates under the corpora­
tion income tax by, say, 4 points, as proposed in Section 121 of the House
bill. The benefits would, likewise, go to all corporations but would be of
the most help to the smaller ones, ¿mch a reduction, it is estimated, would
mean a loss of revenue of about 400 million dollars.
These two reductions, of primary benefit to the smaller individual and
corporate taxpayers, would amount to approximately 2.4 billion dollars.
Any further reductions would benefit primarily those best able to pay.
This is particularly true with respect to repeal of the excess profits tax.
By and large, business and industry which is in the excess profits tax has
never been so well off, never had such vast accumulations of cash or its
equivalent, never had bigger earnings after taxes, and never had such glow­
ing prospects of profits as are to be made in filling the unprecedented
backlog of demands from domestic as well as foreign sources.
It is highly significant that expectations of outright repeal of the
excess profits tax are having four adverse effects: (l) It is doing much to
boom the stock market, drawing into this vortex of speculation funds that
the Government ought to be getting. (2) whetting the appetite of labor for
bigger demands, reinforced by strikes. (3) Inducing corporations in the
excess profits group to avoid any further sales in the last quarter of this
year, because, obviously, profits after January 1 would go untaxed so far
as the excess profits tax is concerned if Congress repeals it as of that
date. (4) Inviting inventory speculation in anticipation of profits result­
ing from rising prices together with lower taxes.
Some moderate reduction in the excess profits tax may be justified in
order to discourage wasteful expenditures, but the tax should be retained
at a rate of 70 per cent, certainly not less than 60 per cent, during the
coming year. This will bring in urgently needed revenue from those corpora­
tions best able to pay and will be a damper on speculation as well as a
curb on war profits. It will help to demonstrate to the public that the
Government means to hold the line and protect the purchasing power of the
The argument that business needs a special tax incentive to produce
and to employ people at this time is inconsistent with the basic economic
facts. The war demonstrated that if business has orders it will go ahead
producing and furnishing employment notwithstanding hi^i taxes. Business
has never had such a peacetime prospect for orders as it has today because

-3demands — - foreign and domestic — are so large and so far in excess of
supply* M t h such intense demand and the sharp competition for markets,
production would go ahead if there were no reduction in the excess profits
tax. It cannot logically be held that removal of this tax will give needed
incentive to existing business* As for new business enterprise, its main
problem is to obtain material and l©,bor in order to get underway in compe­
tition with established industry.
Mot unless it were to be carried over as a permanent part of the tax
structure and at high rates, could the excess profits tax be considered a
deterrent to new and small enterprises because it usually takes years at
best for them to make earnings that would be subject to such a tax. More­
over, the Tax Adjustment Act of 1945 provides for an exemption of $25,000
under the excess profits tax. This is a decided boon to the smaller concern,
though it means little to the large and most profitable ones. Instead of
benefiting from repeal of the excess profits tax now, the smaller corpora­
tions would lose the advantage of the exemption* And to repeal the excess
profits tax and leave the normal corporation tax as it is would work still
further to the advantage of the larger and to the disadvantage of the
smaller concerns, generally speaking.
The argument is frequently made that repeal of the excess profits tax
will make no great difference in revenue collections because corporations
will pay in dividends to stockholders what would otherwise be taxed from
the corporation in excess profits. This would only be true, however, if
dividend recipients were taxable at the same rate and If there were a suf­
ficiently effective tax on undistributed earnings to induce corporations to
pay them out in dividends instead, of retaining them and thus adding to the
value of their corporate securities. Average rates under the individual in­
come tax are much lower and there is no specific tax on undistributed earn­
ings. The result of retaining them is to enhance the value of securities
and to add to speculative trading in them. Most gains from such trans­
actions, under present capital gains taxation, are subject only to a max­
imum rate of 25 per cent*
The contention that repeal will help to provide employment and pre­
vent deflation is equally untenable in the light of the foregoing factors.
Hie unemployment we are witnessing is transitional, not chronic. It is
not spreading into a cumulative deflation such as we witnessed after 19^9 >
and cannot take such a course so long as purchasing power and demand are
so great* Under democratic government, labor cannot be ordered around but
is drawn by economic pressure from places where jobs no longer exist in war
production to places where jobs will exist in peace production. To char­
acterize the immediate economic outlook; as predominantly deflationary is
superficial* In order to assure a rapid and permanent reemployment of
service men and war workers, the first need is to prevent inflationary
developments that would lead in the end to an ultimate breakdown and
tfot only on economic grounds, but as a matter of equity, repeal of
the excess profits tax is inconsistent with the facts, for it would benefit,

generally speaking, the industrial giants, not small business. ¿Hiring the
war years, profits of taxable corporations averaged about 25 billion dol­
lars before taxes as compared with 7 billions from 1938 to 1940. Even
after taxes, these profits averaged about 10 billions during the war years
as against 6 billions in the prewar years.
Miile the excess profits have been received by corporations of all
sizes, nevertheless, preliminary tabulations for 1943 show that less than
10 per cent of excess profits taxes for that year came from corporations
with taxable excess profits of less than $100,000, while over 70 per cent
came from corporations with profits in excess of #1,000,000. Also, the
tabulation shows that income subject to excess profits tax has been a sub»
stantially higher percentage of total income for large than for small
corporations. Thus, this ratio amounted to 30 per cent for corporations
with taxable excess profits under $25,000; 53 per cent for corporations
with profits between $25,000 said $50,000; and approximately 70 per cent for
corporations with profits in excess of %500,000.
Wot only have corporate profits been higher during the war than ever
before, notwithstanding increased rates and the excess profits tax, but
business in general has never before accumulated such vast amounts of
liquid assests. According to estimates as of the end of 1944» corporation
holdings hoidinge of Government securities, bank deposits and currency
amounted to nearly 50 billion dollars, or almost four times the amount of
the same items at the end of 1939* In the face of this financial position,
it cannot be said that business as a whole needs tax relief.
To take off the excess profits tax now means not only that corpora­
tions least in need of tax relief or incentive will benefit by some 2-1/^
billions — half of what the Treasury sanctions in tax reduction at this
time — while the repeal would be of no benefit to the great bulk of small
or new enterprise, but the position of the larger companies will be still
further improved by prospective refunds and benefits under tne Tax adjust­
ment Act of 1945» which are estimated to reach a total of over 4 billion
dollars in the coming year. */
For many of the same reasons, the wartime excise taxes should be
among the last, not among the first levies to be removed. These, broadly,
are taxes on luxuries. To repeal them after July, as proposed in the House
bill, would mean a loss in revenue estimated at about 550 million dollars.
They should be retained until inflationary dangers are past and the budget
in balance.

This 4 billion dollars is estimated to includes 1.1 billion dollars
from the cashing in of postwar refund bonds; 1.2 billion dollars from the
carryback of unused amortization charges for plant and equipment purchased
under Certificates of Necessity; 1.2 billion dollars from the carryback of
anticipated (1946) losses and unused excess profits credits, applied against
1945 liabilities payable in 1946; 700 million dollars from the current ap­
plication of the postwar credit against 1945 liabilities payable in 1946.
Due to the many uncertainties involved these estimates, with the exception
of the first figure, are necessarily uncertain. However, the estimates are
on the conservative side.

-5To sum up* if any reductions are to be made at this stage, they
should benefit primarily those at the bottom of the income scale, not
those individuals and corporations best able to pay taxes. Repeal of
the excess profits tax in particular not only favors the fen and the
financially strongest corporations, but it would grant them these
benefits, including refunds, at the Governments expense Wien revenue
is of critical importance; it sets an example in pocketing what are in
fact war profits that makes it difficult to argue that labor should be
denied correspondingly large wage increases; and the effect is to in­
vite the familiar wage-price upward spiral.
The underlying need at this stage is not to arrest a deflationary
spiral and to put funds into the hands of people who will spend them or
to offer special tax inducements to business to produce. The basic under­
lying need is to restore as rapidly as possible a budgetary situation
which will maintain faith in the currency and preserve the buying power
of the billions invested in Government securities and other savings.