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lay 29, 1940


The newspapers of yesterday afternoon and this morning carry
reports of an agreement between the Administration and Congressional
leaders to raise the debt limit by $3 billion and to impose additional
taxes of about #700 million to pay interest and amortisation charges on
this amount* Agreement on the type of taxes to be raised is apparently
to be reached this morning*
The details of this agreement show signs of extreme haste and
a complete neglect of the economic effects which xaay be expected to follow
from the suggested tax increases«
The rate of expansion of our national defense program over the
next few years is still uncertain, and it seems likely that it will be
limited t r the necessity for organizing the production of the specific
items needed rather than by the size of the appropriations«

There is

every reason to believe that with the most strenuous efforts to accelerate
defense activity* the increase in output over the next twelve aonths will
be small in relation to the idle capacity of our industrial structure as
m whole*
The increase in defense expenditures* therefore, cannot be
relied on to bring about anything like full employment in that period*
Meanwhile, de&estic business ©ay be subjected to two serious shocks* One


of these la the possible termination of hostilities In Europe with all
that It will mean In teims of cancellation of Allied orders and dislocation of our export trade. The second Is the catastrophic decline
in stock prices which is certain to be the stock market* s reaction to
peace or rumors of peace*
In the light of these possibilities it would be extremely unwise to tighten consumers* belts now* This would be precisely the effect
of the suggested 10 per cent Increases in manufacturers* excises, and in
the tobacco, gasoline, beer and liquor taxes, These tax increases will
strike directly at the market for the products of industry, not merely
the products on which the taxes are levied but the whole range of
articles Included in consumers* budgets* Taxes on consumption already
make up a disproportionate part of our federal tax structure and a true
program of financial preparedness would Include reductions rather than
increases in such taxes*
The size of the immediate Increase in defense expenditures will
not be such as to require hasty enactment of a superficial and ill*
considered tax measure* Financial preparedness for a defense program of
the scale which can already be foreseen makes it essential, however, to
plan a comprehensive revision of our whole tax structure adapted to our
total economic situation as it develops under the gradually mounting
impetus of our defense outlays*

If Congressional sentiment makes it

necessary to enact additional taxes at once, it would be far better to
impose an excess profits tax, the details of which have already been fully
drawn up# than to make the suggested horizontal Increase in tax rates