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u- SUMMARY OF TAX SUGGESTIONS By M. S. E.ccles Chairman, Board of Governors of the Federal Reserve System Made at the request of the Joint Committee on Internal Revenue Taxation, August 2h* 1943s and again submitted when requested to appear before the House YJays and Moans Committee in Executive Session, October 29, 191+3• The proposals made to tho Committee call for what appears at f i r s t a staggering additional conount of taxation, 013*8 b i l l i o n s , of which, however, b i l l i o n s would bo refundable after conversion to peacetime production, so that the net additional taxation would bo |9»8 b i l l i o n s . Any less at this time, in view of prospective d e f i c i t s ($70 b i l lion for tho f i s c a l year 1924-3-^4) would f a l l short of coping with the danger to the economy resulting from continued accumulation in the hands of the public of spendable funds that vastly exceed the amount of c i v i l i a n goods that w i l l bo available during the y/ar and in the reconvorsion period. No dependable alternative exists to taxing back into tho Treasury at this time as much as i s practically possible of this dangerous surplus. IThilo striving to remove from the marketplace spendable funds that cannot be spent now or until reconversion without ruinous e f f e c t s for .all of the people, wo must s t i l l adhere to the principle of a b i l i t y to pay. By providing refunds, especially for people in the lower-income groups, a share in future production w i l l bo assured to thom. Now, i f ever, i s tho time to cut tho d e f i c i t to the utmost, when individual incomes are at a peak, when purchasable goods are increasingly scarce, and when war expenditures have leveled out. When tho war ends, a natural desire to relax rationing and price controls and reduce taxation w i l l make i t additionally d i f f i c u l t , i f not impossible, to prevent destruo^ i v o inflationary developments in tho transition period after the war. The facts of the situation are incontrovertible — rapidly increasing war expenditures now approaching a peak level, a rapidly widening d e f i c i t notwithstanding increased taxes, and a steadily growing excess of consumer buying power over and above available consumer goods. Economy, though well worthwhile i f i t does not impair tho war e f f o r t , at best s t i l l leaves a dangerous d e f i c i t and a need for strong measures of taxation, directed especially at people with incomes of '>5*000 or loss, who receive about 3CF/o of total i n dividual incomes. The gross yield of the suggestions to tho Committee i s estimated at 013*8 b i l l i o n s . Of this t o t a l , $10 b i l l i o n s would be obtained from levies on personal incomes, J3 b i l l i o n s from excises, and •.8 b i l l i o n from corporation taxes. ' Of the ^10 b i l l i o n s to bo obtained from personal incomes, §6 b i l l i o n s would be outright tocos and lh b i l l i o n s would be refundable taxes. On the whole, the yield would thus be b i l l i o n s in outright taxes pnd Sij. b i l l i o n s in refundable ta^cec or compulsory savings. (See table below.) - 2 - The more important points of the suggestions are as follows: lf The additional yield from tho individual income tax would bo derived by lowering exemptions for married persons to J800, by lowering the credit for dependents to 025O, and by imposing a supplementary wartime (sur) tax. The supplementary tax would be in addition to the present income tax, resulting in a withholding rate of 33 por cent of gross income in excess of withholding exemptions. 2. The proposed broadening of the income tax and the substantial increase in rates for a l l income rangos i s based on the b e l i e f that the i n come tax i s the most equitable nee lis of obtaining the necessary increase in wartime taxation. Evon though a drastic lowering of exemptions i s proposed* the burden upon people in the lo?/er income groups, say, a family with an i n come of $lf)00, would be much less under tho proposed income tax than i t would be under a sales tax. At the same time, tho contribution of a family with an income of, say, $1,500, would be considerably increased ovor i t s present level. 3* Half of the yield cf the supplementary tax would be refundable at some tine after the war. After deducting $2 b i l l i o n for r e l i e f to fixed incomo groups, refundable taxes would ojaount to b i l l i o n . The refundable portion of the supplementary trx would be the largost for the lower ineamos and would decline as incomes increase. Tho f i r s t $50 of supplementary tax Y/ould bo f u l l y refundable. Rofunds would be limited to $1,000 to be reached at an income of about ^15,000. Tho combination of a sharp increase in income taxes with substant i a l refundable taxes (compulsory savings) recognizes that wartime taxes on tho lower income groups must be high, but that considerations of equity c a l l for refunding part of tho incroasod taxes ofter conversion to peacetime production. An additional point i s that compulsory savings should bo so arranged that thoy would become available rt once when individuals and the economy of the country would be most benefitted. I,}.. Relief to taxpayers with fixed or declining incomes would be provided for by allowing these taxpayers an immediate reduction of the proposed increase in income tax, the roductior. to be the greater the smaller tha increase (or the greater tho decline) in their incomes* The r e l i e f would apply largely against the refundable pert of the tax and might amount to 1 or 2 b i l l i o n dollars. 5. Simplification of the income tax i s recommended as follows: a. The net Victory Tex: should be absorbed into the normal tax of tho regular income tax by raising this rate t o 10 per cent. b# Mandatory tax returns should be eliminated for taxpayers whoso incomes do not exceed the f i r s t surtax bracket. For these taxpayers, the amount deducted from their pay on the basis of withholding tax provisions should be acceptcd as a final tax. 6. An increase of from 5 to 10 per cent in the corporation income tax to yield OESOO million is.recommended. - 3 - 7« The additional yield of b i l l i o n from excises should como fron a broad group of commodities c l a s s i f i e d as nonessentials; This ap-^ proach would bo superior to a general sales tax since necessities would be excluded and d i f f e r e n t i a l ratos would bo applied to other commodities. Price increases due to the inpesition of such taxes should not be considered as part of the cost of a wartime standard of living, and thus should not be permitted to be reflected in either wage or parity formulae. The following table summarizes the suggestions presented above. I t should.be noted, howovcr, that the appromoh taken night be easily adapted to overall yields of different magnitudes. Estimated Yield of Revenue Program (Jii b i l l i o n dollars) Total Porsonal Incono Tax Excise Taxes Corporate Income Tax Total l/ 10 l / Refundable Tax Outright Tax I4. i f 6 3 3 .8 - .8 13.8 k 9.8 After allowing 02 b i l l i o n for r e l i e f to fixed income groups. November 1, 191+3 I MEREST-BEARING U, S. GOVERNMENT DEBT - SEPTEMBER JO, 19^3 (In millions of dollars) Nonmarketable public issues: Savings bonds: Serie's A to D Series E Series F and G Unclassified Total Tax and savings notes Depositary bonds Adjusted service bonds Total nonmarketable public issues Marketable public issues, due or callable: Within 1 year: Treasury b i l l s Certificates Treasury notes Treasury bonds Postal savings bonds Total In 1 - 5 years: Treasury notes Treasury bonds Conversion bonds Total In 5 years: Treasury bonds After 10 years: Treasury bonds Panama Canal loan Total Total marketable public issues Special issues Total intorest-bearing direct debt Fully guaranteed issues: Commodity Credit Corporation Federal Farm Mortgage Corporation Federal Housing Administration Federal Public Housing Authority Home Owners1 Loan Corporation Reconstruction Finance Corporation Tennessee Valley Authority U. S. Maritime Commission Total f u l l y guaranteed issues Total interests-bearing debt outstanding 3,61h 13,510 7,201+ 150 2U,U78 8,851 361 220 33,910 13,05U 21,136 2,270 2,920 117 39,1+97 9,326 12 M 29 21,802 27,013 23,061* 50 1X1,1426 11,717 IfiQ 930 22 11U 1,533 876 3,96k 161,018
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