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Statement of Secretary Morgenthau
before the Senate Finance Committee,
Thursday, September 3, 1942.
I have come before you today with a program to
raise substantial additional sums to finance the war

I intend to leave the details of the presenta-

tion to Mr. Paul and his associates and to limit myself
to emphasizing the gravity of the situation as I see
it and the imperative need for legislation along the
lines we are suggesting.
Up to this point our huge war expenditures have
been financed in an orderly way and with a minimum of
inflationary effects. But the more successful the war
production program becomes, the greater are the
dimensions of the fiscal problem we have to face. We
have to plan for expenditures of $80 billion in the
present fiscal year, while the revenue in sight on the
basis of the tax bill now before you is only approximately 24 billions.
The Treasury has diligently sought and will
continue to seek funds from those sources where
borrowing will have the least inflationary effect,

- 2 and we have done so with what I believe to be most
gratifying results. We can foresee with confidence
provision for the Governments fiscal needs for the
remainder of this calendar year.
But I am here today to tell you frankly that I
need your help in the form of legislation which will
enable me to meet, with the same degree of confidence,
the much greater problem of raising the necessary funds
for next year.
The legislation which we are proposing has a
double purpose. The first purpose is to draw into the
Treasury substantial additional' funds out of the
earnings and savings of the people. The second purpose
is even more important.

It is to reduce consumer

spending directly by withdrawing funds otherwise
available for expenditure, and to reduce it also
indirectly by creating a strong tax incentive to
The measures we propose are two: first, a tax
on consumer spending which will reach into the lowest
income groups above the level of bare subsistence

- 3 income- and will provide high penalty rates for luxury
spending; second, a further lowering of the exemptions
from the income tax applying to family income.
The two proposals will reach into incomes aggregating some 65 billions of dollars and will draw into
the Treasury an estimated six and a half billion dollars
otherwise available for consumer spending. But of this
total some four and a half billions, although raised as
a tax, will be treated not as revenue but as a debt to
the individuals from whom it was collected, to be repaid
after the war.
Revenue is not the sole purpose, nor even the
primary purpose, of either of these proposals. Their
main purpose is to restrict consumer spending so that,
as far as possible through fiscal means, we may avoid
the perils of inflation in the huge financing program
that we have ahead of us.
It can be expected that the new spending tax will
reduce in many individual cases the amounts which
workers can afford to set aside for War Bonds under
voluntary payroll deduction plans.

In the face of

- 4 present conditions we can no longer afford to rely
entirely upon voluntary lending. The new proposals
are intended, therefore, to supplement the voluntary
bond purchase program.
It is my belief that the voluntary War Bond
program has produced and will continue to produce a
great contribution to the nation's war effort. This
is due to the unselfish service that hundreds of
thousands of men and women throughout the country have
given to it. They deserve the thanks of the nation
for the magnificent work they have done, are doing,
and will, I hope, go on doing, in encouraging the
American people to put their dollars to work for their

The voluntary War Bond program will, of

course, be continued.
Our present and urgent problem is to borrow the
great amounts that will be needed to finance the war
effort in ways that will not contribute to inflation.
Inflationary pressure is created by consumer demand
exceeding the supply of goods available. The Treasury
is seeking in these proposals to attack the problem at
its roots and to attack it drastically.

- 5 Th6 control of prices is of course not exclusively
a fiscal problem. But with full allowance for all that
can be done through price regulation, rationing and
other devices to control supply, I think that we, who
are jointly responsible for tax policy and legislation,
shall be doing very much less than our full duty if we
do not deal with the problem as effectively as possible
in the fiscal field. What I have presented is a method
— and the best method the Treasury has been able to
devise — for accomplishing this result.
If the proposals we make seein drastic, I should
like to say with all possible emphasis that I believe
nothing less drastic will accomplish the results we
must have. This is no time for half-way measures.
With the fullest respect for the Committee on
Finance, but with a strong sense of our joint
responsibility in these critical times, I do not
merely recommend bold action along these lines; I
request it and I urge it most seriously, and with the
profound conviction that it must be done.