Taxation and National Defense
WE MUST FAIRLY DISTRIBUTE THE BURDEN
By HENRY MORGENTHAU, Jr., Secretary of the Treasury
Made before the Senate Finance Committee, August 8, 1941
Vital Speeches of the Day, Vol. VII, pp. 700-702.
MY purpose in being here today is to discuss taxation as an essential part of national defense. Our great problem in providing for the defense of the nation is fundamentally the problem of production—of actually building planes and tanks, ships, and guns with labor, management, machinery and raw materials. To solve that problem without impairing our economy or weakening the structure of democracy, our fiscal policy must be adapted to the needs of the times.
On April 24 I discussed with the Ways and Means Committee of the House the need of producing $3,500,000,000 annually in additional revenue. The Treasury Department presented a suggested program for raising that amount of money. As it passed the House, this bill will produce approximately $3,200,000,000 in additional revenue. In my] opinion it is very important that the revenue yield be raised to at least the original $3.5 billion level.
It is also important that the bill be passed as promptly as possible. Income tax payers and excess profits tax payers should know as quickly as possible what their taxes on 1941income and profits are going to be, since more than seven months of the year have already elapsed.
Says Delay Causes Big Loss
The excise taxes and the estate tax cannot be imposed retroactively and every day's delay in the passage of this tax bill costs the Treasury several million dollars in revenue from those sources.
The rapid developments of the last few months have made this bill inadequate even before it is passed. Since my statement before the Ways and Means Committee, many things have happened. Two and one-half months ago the President proclaimed the existence of an unlimited national emergency. He called upon "all loyal citizens to place the nation's needs first in mind and in action to the end that we may mobilize and have ready for instant defensive use all of the physical power, all of the moral strength and all of the natural resources of this nation.
Since I appeared before the Ways and Means Committee, the amount of appropriations, authorizations and recommendations over and above the budget has increased by about $14,000,000,000, thus completely changing the fiscal picture and greatly increasing the need for revenue.
Since I appeared before the Ways and Means Committee, prices and the cost of living have increased at an accelerated rate, thereby accentuating the need for a strong fiscal program.
An "All-out" Taxation Plan
In the light of these and other developments resulting from "all-out" defense, I should like to point out what, in my opinion, will be necessary in "all-out" taxation to support such a program.
First of all, we shall need more revenue—much more revenue. The defense program is an absolute necessity. It must be paid for. In so far as possible, it should be paid for now. Borrowing should be kept to a minimum to maintain our fiscal strength. The rise in the Federal debt means merely that the taxpayer's burden is being postponed—that both principal and interest must be paid later out of higher taxes collected at a time when they may be harder to pay and less willingly paid than now.
Along with increased taxation should go the maximum reduction in the ordinary non-defense expenditures of government. The burden of paying for defense is so heavy that it should be relieved at every possible point.
Increased taxation is needed also to maintain economic stability. Rising purchasing power is exerting increasing pressure on the prices of many kinds of goods, while at the same time production of these goods is being increasingly curtailed by the necessity of diverting our resources to defense uses. This complication of increased demand and restricted output is causing inflationary price rises which threaten to increase the cost of the defense program, unbalance family budgets and seriously disturb our economic life.
For Taxes on Those Able to Pay
This larger needed revenue should come from all sources where there is ability to pay—that's what an "all-out" tax program means. The people of this country have never been more ready to make sacrifices for the common good. Our tax program has not kept pace with the defense program. We are still thinking too much of helping this group or that to escape its share of the burden. We have now come to the point where it is a matter not merely of fundamental equity but of the utmost necessity that all exemptions from taxation be reduced to the absolute minimum.
An "all-out" tax program for defense should reach ability to pay at several points not now fully tapped:
1. In my opinion such a tax program might well involve a substantial lowering of personal exemptions and a consequent broadening of the base of the income tax, if simultaneously we take immediate steps to remedy defects in the application of the principle of ability to pay in other parts of the tax structure.
Under the bill before you the base has been broadened to add about two million new taxpayers, but even so there will remain a relatively large proportion of the population in the lower income groups which will not be directly affected by the income tax. A further lowering of the exemptions would produce some additional revenue and in addition it would give millions of Americans an opportunity—a welcome opportunity—to make a direct contribution through taxes to the defense of their country. It would enable them to feel that they were participating personally and directly in the defense program. As the President wrote to Chairman Doughton on July 31, "most Americans who are in the lowest income brackets are willing and proud to chipin directly even if their individual contributions are very small in terms of dollars."
Calls for Excess Profits Levy
But I believe this committee will agree with me that we ought not to accept such sacrifices, even though willing sacrifices, from millions of people with low incomes on whom the burden of other types of taxes falls most heavily, unless we reach in other places ability to pay which is escaping its fair share of taxes. Among these are the following:
2. The excess profits tax exempts profits of even the most prosperous corporation, except to the extent that such profits are in excess of its average profits for the years 1936-39. Surely Congress will not wish to impose additional taxes on millions more of our low-income group, unless it also imposes the excess profits of such corporations.
3. Families pay lower Federal income taxes when both husband and wife receive income than when the same total amount of income is received by only one of them. This is a discrimination of which many wealthy people have taken advantage by large gifts of income-producing property between husband and wife. Furthermore, in at least eight States of the Union, Federal income taxes are made substantially lower than in the remaining States because the local law permits the splitting of income between husbands and wives.
Asks End of Discriminations
Here are discriminations against the rest of the taxpayers which, I believe your committee will agree, must be eliminated if we are to extend the income tax downward to include millions of persons with low income. The discriminations can be eliminated by requiring husband and wife to file a single joint return with appropriate relief granted only where both husband and wife work outside the home.
4. For years the concerns engaged in extracting certain of our natural resources, notably oil, have been granted far greater allowances for depletion than can be justified on any reasonable basis of tax equity. If the income tax is to be extended to lower incomes this privilege of tax escape should simultaneously be removed.
5. A few months ago the Congress eliminated the tax-exemption privilege from new issues of Federal securities. The purchases of new State and local securities still enjoy this exemption. The exemption was inequitable and expensive even in more normal times. It cannot be borne longer in a time like this and especially if we are to increase the direct tax burdens of persons with small incomes.
Estate and Gift Taxes Stressed
6. In its suggestions to the Ways and Means Committee, the Treasury recommended substantial increases in estate and gift taxes and lower exemptions. In part, this recommendation was followed, but, in my opinion, the estate and gift taxes should reach more estates and provide more revenue if we are going to tax smaller incomes.
Those are some of the things that I mean when I say that an "all-out" tax program for defense must go far beyond the present bill.
There is another condition which I would attach to lowering the personal exemptions. I think we ought not to take into the income-tax system millions of new taxpayers with small incomes without simplifying the way in which their tax is computed.
Take, for example, a person with a $900 salary. Under the present law, he first figures out what deductions he has—taxes paid, interest paid, contributions and so on. Then he computes his earned income credit. Then he subtracts his personal exemptions from his income after deductions.
On the balance, under rates of the bill before you, he computes a surtax at 5 per cent. Then he goes back to the income and deducts his earned income credit. On the balance, he computes a normal tax at 4 per cent. He then adds the normal tax and the surtax and takes 10 per cent of the total for defense tax. He adds the defense tax to the normal tax and surtax and finally arrives at his income tax.
Computation Is Called a Strain
When he started to fill out his return, he may have been full of patriotic enthusiasm to pay his share toward the defense program, but by the time he has finished his last computation his cheerfulness may well have collapsed under the strain.
It is difficult enough for persons with substantial incomes who are used to dealing with financial papers and who can afford high-priced lawyers and accountants to make their computations for them. The person with a small income should not be put to this annoyance and possible expense.
Furthermore, the checking of these tax computations by the administrative authorities takes time. Frequent errors are found which must be rectified, requiring correspondence and further annoyances of the taxpayer as well as expense to the government. We in the Treasury do not enjoy pestering the taxpayer any more than he enjoys being pestered by us.
For taxpayers with relatively large incomes, refinements in determining income and computing taxes are troublesome but are necessary in the interest of equity. For small taxpayers, however, especially those now taxed for the first time, these refinements are cumbersome and confusing without serving any important purpose. The income tax of millions of people can be determined with acceptable accuracy by less involved methods.
Simple Payment Is Urged
As the President suggested to Chairman Doughton, there should be a provision in the case of the small taxpayer "for a straight, simple payment of some small contribution to the national tax income through a simple agency and on a simple form."
For such taxpayers a plain and easily understood table could compute his tax bill in a few moments. He would be spared time, trouble and annoyance and the government would be spared expense.
To indicate more clearly what I have in mind, I have had prepared a sample table showing how this might beworked out in practice for incomes up to $3,000. This is only a preliminary table, and improvements and changes will no doubt be desirable, but it will illustrate how the proposal can be applied.
The taxes imposed by the bill before you are very heavy; the taxes of an all-out program would be even heavier. I am convinced that the people are not opposed to heavy taxes; that, in fact, they favor heavy taxes because they know that the alternatives are much more onerous. At a time when expanding incomes are operating to force prices upward many kinds of measures must be employed if prices are to be kept under control. Without heavy taxation the other measures have little chance to succeed.
Rising prices would take much more away from our people now and in the future than higher taxes now will take. Under the tax bill in its present form a married couple with no dependents, having a net income of $5,000 a year will have its Federal income tax increased by $198, or 4 per cent of its income.
Cost of Living Is Stressed
Assuming that two-thirds of the family's income is spent on items affected by a changing cost of living, an increase in the cost of living of 6 per cent would impose as great an additional burden on this family as would the proposed income tax. The cost of living index has increased 5 1/2 per cent since September, 1940.
It is clear from this simple illustration that rising prices tax the family income just as surely as do income taxes. Although, as prices rise, the income of some families will increase, many incomes will not increase and most incomes will not increase as fast or as much as prices.
If, in an attempt to protect the incomes of our people, we hold down taxes and as a result the cost of living rises, we shall have taxed them just as surely as if we had levied on them directly, and we shall still have the inflated costs of defense to pay later from taxes.
An all-out tax program will build public morale in an all-out defense program. By reducing the necessity for borrowing it will strengthen confidence in the impregnable fiscal position of the government.
By contributing to the control of prices it will help prevent the demoralization which would result from inflation. By distributing the defense burden fairly it will help unite the nation. It will make all the people equal partners in sharing the cost of the defense of our country.