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October 9, 1941
FISCAL POLICY IN THE POST-DfiFENSE PERIOD
Summary
A study aimed a t evolving the basis for a post-defense f i s c a l
program should contain the
following
elements:
1#
A comparative analysis of f i s c a l policy (forfeijgn f i n a n c i a l
developments, as w e l l as our own past experience;,
2.
A presentation of the type of f i s c a l structure which we are
l i k e l y to have at the end o f "the war (as a working basis i n
the consideration of fltture programs).
3.
A presentation of the essential elements o f a post-defense
f i s c a l program (including an examination o f the relationship of
post-defers e f i s c a l policy to t h e whole national and i n t e r national scene) f
4.
An examination of the means of t r a n s l a t i n g recommendations i n t o
policy and action.
Post-Defense Objectives
The generally accepted social objectives of the American people may
be translated ( a t the policy l e v e l ) i n t o a program, for the post-defense
period, which embraces the following:
1.
The formulation of a large o v e r - a l l governmental program of
services and expenditures based on our more essential social
needs,
2.
The evolution of a Federal tax structure which would meet the
requirements of encouraging economic s t a b i l i t y and progress,
as w e l l as those of equity, adequacy, md administrative ease*
3.
The development of means of executing u n i f i e d and coordinated
f i s c a l policies a t a l l levels of government, the extension of
national standards of service, and the equalization of f i s c a l
resources among t h e various areas of the nation,
A Post-Defense Program of Governmental Services and Expenditures
To be t r e a t e d i n the proper context, the study must involve
consideration o f these factors of post-defense adjustments:
- 2 1.
Estimated labor supply
2#
Estimated plant capacity
3.
Estimated backlogs end deferred demands
4.
Estimated savings
5.
Anticipated volume of private capital
6.
Estimated glro$s national product anl national income.
7.
A governmental# program necessary to maintain f u l l employment
(includir^ programs for the extension o f social services; public
improvement projects - especially urban redevelopment and
housing, and developmental programs on a regional basis; and
the i n t e g r a t i o n of our economic system more closely w i t h t h a t
of the outside -world).
expenditures
I n s e t t i n g f o r t h the magnitude and character of the probable (and
desirable) governmental services and expenditures for the post-defense period,
what i s important i s not the accuracy of the estimates - which merely providea working basis - but the h i g h l i g h t i n g of our social needs as w e l l as the
broad expenditure requirements of a f i s c a l policy aimed at f u l l employment•
The gap which w i l l be l e f t by the dropping out of the larger part of
defense expenditures must be f i l l e d by consumption and net c a p i t a l formation
i f we are to maintain f u l l employment.
Thus, governmental p o l i c i e s w i l l have
to be directed a t the expansion of consumption and investment.
Furthermore,
the Federal Government w i l l have to be prepared to play a balancing r o l e ,
checking any temporary tendency toward an excessive boom, and, on the other
hand, prepared to go forward w i t h large expenditures to compensate for any
strong tendency toward d e f l a t i o n and depression,
I t i s extremely important
to hold i n readiness both an adequate program of useful public improvement
projects and programs for the extension of social services*
The l i m i t a t i o n s upon the taxable resources and borrowing capacities
of the States and l o c a l i t i e s mean that increased expenditures, i f l e f t to
State and l o c a l u n i t s , can only be financed out of regressive taxes.
Such
- 3 -
taxes can o f f s e t almost a l l of the s o c i a l b e n e f i t s and economic stimulus
t h a t are derived from the expenditures which they help to
00trpr.
I t would be useful t o draw up a model based on administrative and
economic considerations alone, aiming a t an i d e a l d i s t r i b u t i o n o f governmental
functions.
The Federal Tax Structure
Eow much r e l i a n c e should be plaoed on t a x a t i o n , borrowing, and
changes i n the money supply as a means of financing the governmental
expenditure program depends upon a v a r i e t y of considerations.
It
involves
judgments with respect to "the adequacy of the means o f payment, adequate
l i q u i d i t y , the importance under c e r t a i n conditions of using r e l a t i v e l y
expansionist and less r e s t r i c t i v e methods of financing, the r e l a t i v e desirab i l i t y of tapping t h e savings stream through borrowing or through t a x a t i o n .
A decision as to t h e d e s i r a b i l i t y of reducing the public debt i n
the immediate post-defense period {and i f i t i s to be reduced, the r a t e a t
which i t i s t o be done), must depend i n large part on the vigor of the p r i v a t e
investment boom.
Furthermore, i f a large part of the public debt i s t o be
r e t i r e d , the character of the tax structure through which the t r a n s f e r
payments ( w i t h i n the community) b.re effected becomes a l l - i m p o r t a n t .
I f the
e f f e c t of the t r a n s f e r i s to reduce consumption and increase savings, a
serious d e f l a t i o n a r y movement may be s t a r t e d , or encouraged.
C e r t a i n l y , debt
redemption should not precede a proper adjustment of the tax structure.
In
general, f u l l consideration should be given t o the e f f e c t of the public debt
( 1 ) upon the d i s t r i b u t i o n of income; ( 2 ) upon the propensity t o consume;
( 3 ) upon the supply of fUnds for investment; and ( 4 ) upon the banking.system
and the e f f i c i e n c y of techniques of c r e d i t control.
- 4 The formulation of tax policy i n the post-defense period must be
based c h i e f l y upon considerations of c e r t a i n desirable relationships of the
tax structure to t t e national economy*
I n general, we should aim at a tax
structure which, i n the post-defense period
1,
involves a minimum reduction of consumer purchasing power;
2#
generally, is highly progressive at a l l ranges;
3,
discourages any tendency to oversaving;
4.
imposes as few obstacles as possible i n the way of
investment*
An immediate problem i n the postwar period w i l l be to maintain
consumption levels at a time when there may be a-severe reduction i n governmental expenditures,
A drastic reduction in consumer taxes would stimulate
consumption and help maintain these l e v e l s .
I t would be h e l p f u l to stress
publicly end constantly the f a c t that the increases i n consumption taxes
during the defense period have specific purposes — to control production of
c e r t a i n a r t i c l e s and to prevent i n f l a t i o n — so as t o c r y s t a l l i z e sentiment
for an immediate reduction i n consumption taxes a t the end of the defense
effort.
Attention should also be paid t o the p o s s i b i l i t y of reducing p a y r o l l
taxes.
I t i s clear t h a t i f regressive taxes are to be substantially
reduced, and i f our Federal tax structure is t o be progressive from top to
bottom, the r e l a t i v e importance of the income tax i n the Federal revenue
system w i l l have t o be greatly increased.
A mere broadening of the income
tax base i n terms of reduced personal exemptions and credits for dependents
i s not enough.
Income for income tax purposes should be brought i n t o b e t t e r
harmony with t r u e income.
To broa,den the income tax base substantially
would require revisions i n several directions:
1.
Tcpcation of stock dividends and corporate earnings;
2#
Disallowance of the personal exemption and c r e d i t for
dependents i n the computation of net income subject t o
surtax;
3,
Taxation of i n t e r e s t from Government s e c u r i t i e s ;
4.
A b o l i t i o n of the p r i v i l e g e enjoyed by husbands and wives
of f i l i n g separate returns.
The progressivity of the Federal tax structure could further be increased by
changes i n estate and g i f t tax provisions*
The question as to whether high turtax r a t e s , corporate taxes
generally, and the t a x a t i o n of capital gains dampen the incentive to invest
requires careful a t t e n t i o n .
I n analyzing the problem of private c a p i t a l
investment, the & 1 lowing deserve f u l l treatment:
1.
The encouragement of investment through the expansion
of consumptionj
2.
The encouragement of investment i n equity capital$
3.
The elimination o f discrimination against corporations
with highly f l u c t u a t i n g incomes*
4.
Incentive taxation.
Due consideration must also be given t o examining the proper
balance between personal and corporate taxation i n f u l f i l l i n g governmental
revenue needs*
I t seems essential to know how various types (and rates) of taxes
are l i k e l y t o a f f e c t business decisions.
Indications to business reactions
might be obtained through a questionnaire survey conducted by the U, S.
Chamber of Commerce, or a similar organization.
Businessmen would be asked
to indicate t h e i r preference for one o f , l e t us say, f i v e combinations of
taxes, each calculated to produce substantially the same amount of governmental revenue*
- 6 Federal-State-Local Fiscal Relations
A study of intergovernmental relations might begin with an analysis
of the impact of the defense program upon the burdens and f i s c a l capacities
of the States and l o c a l i t i e s .
On the basis of such a study, an estimate of
the f i s c a l position of non-Federal units toward the end of the defense e f f o r t
could be made.
An attempt should also be made to estimate the e f f e c t s of the
proposed service and expenditure program and of the proposed Federal t a x
structure on the f i s c a l position of States and l o c a l i t i e s .
An examination of present trends i s h e l p f u l i n looking toward the
formulation of policy, i n the post-defense period, i n the realm of FederalState-local fiscal relations.
The fbllowing trends seem to stand out c l e a r l y ;
1.
The need for continuing governmental expenditure on a
large scale;
2*
The greater r o l e of the Federal Government;
3.
The increasing reliance o f State and l o c a l governments
on regressive taxea;-
4.
The increasing discrepancies of wealth and of governmental
services i n various areas of the nation;
5.
The increasiig need for coordinated f i s c a l policies a t
a l l levels of government i n combating the problems of
our economy.
These trends point to the need f o r a fundamental revision i n
Federal-State-local fiscal'"relations.
An absorption by the Federal Government
of those functions which are of d i r e c t national i n t e r e s t could have several
b e n e f i c i a l e f f e c t s : (1) Such services could be performed on a high standard
l e v e l ; ( 2 ) The f i e l d f o r coordinated and rapid f i s c a l action would be greatly
enhanced; the problems of our economy could be met with a l l the weapons at
the disposal of the nation; ( 3 ) The States and l o c a l i t i e s would be able to
finance the services o f a local nature out of t h e i r own revenues and without
the pressure to resort to regressive taxes,
A fundamental revision would require, moreover, t h a t , w i t h very fewexceptions, tax c o l l e c t i o n should be transferred from the States to the
Federal Government,
States would depend c h i e f l y upon shared taxes, State
supplements to Federal taxes, and g r a n t s - i n - a i d .
Through the development of
such financial dependence upon the Federal Government, States would become,
i n essence, administrative units — something which i s much to be desired i n
the face of modern economic exigencies and popular demand for more e f f e c t i v e
governmental action.
Such revisions do not, however, remove the necessity for additional
and more immediate improvements i n State and local f i s c a l structures, and i n
Federal-State-local fiscal relations.
Attention w i l l have to be paid to
many other aspects of the problem, among which are:
1.
The improvement i n the c o l l e c t i o n of State and l o c a l
f i n a n c i a l data;
2.
The equalization of burdens and resources; and
3.
The improvement i n the means of coordinating f i s c a l
policies at a l l levels of government.
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