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January 12, 1939,

From the monetary and fiscal point of view the importance and urgency
of making as rapid a transition as possible from an accumulated reserve to
a pay-as-you-go basis in connection with old age insurance cannot be overstressed*
The Report of the Social Security Board approves the imposition of a
higher payroll tax rate in 1940 and hence envisages the further accumulation
of a reserve fund, and the further net withdrawal of purchasing power•
Thus, endorsement of the Report, either implicitly or explicitly, implies
acceptance of a principle of financing old age insurance for which there is
a rapidly decreasing expert and popular support* We are the only important
country that has applied -private insurance concepts to a social insurance
The collection of payroll taxes in excess of benefit payments imposes
a serious drag on recovery* We are faced with a long term problem of deficient consumer buying power, - with an excess of savings over outlets for
private capital expenditures* To continue a system which aggravates this
deficiency intensifies our problem and postpones the day when it will be
possible to balance the budget without interfering with business recovery*
In 1937 the excess of payroll tax collections over benefits was a major
contributory factor in the decline in consumption that preceded the downturn
in business*
In 1928, about $1,000,000,000 had to be spent by the Government merely
to offset the deflationary effects arising from the unemployment and old
age insurance programs and in 19S9 another $1,000,000,000 will have to be
spent for the same purpose* This has the effect of increasing the deficit
without securing a corresponding increase in buying power.
In 1940 and thereafter, the increase in payroll tax collections arising
from (a) increasing payrolls, (b) an extension of coverage, and (c) a fifty
percent higher tax rate, may entail a repetition of the 1957 experience or
the necessity of incurring a ntuch larger deficit than would otherwise be
Since it is likely that tax accruals on old age account will exceed
$900 million in 1940; since it is highly improbable that liberalized benefit
provisions will result in a sum in the next few years approaching this figure
or even the figure of about $600 million in taxes that would be collected
if tax rates were not advanced; and since the reserse fund will amoufct to
$1,700,000,000 at the beginning of 1940, I feel strongly that it would prove
a serious error to permit the scheduled increase in the payroll tax rate to
go into effect*


In any case, we should defer a CQnmdtfflent to increase taxes
until we can secure a better idea of tjie magnitude of benefit payments Congress will adopt#
Our tax system already bears too heavily on consumer buying power«
To increase taxes further on payrolls would be contrary to the spirit
of the Budget Message as they would have "repressive effects on purchasing power**