New Methods Required to Increase Federal Income
INCOME TAX RATES AT PEAK
WALTER F. GEORGE, United States Senator from Georgia and Chairman of the Senate Committee on Finance.
Delivered over the National Broadcasting Company network, January 7, 1944
Vital Speeches of the Day, Vol. X, pp. 273-275.
DURING the month just ended, our Federal government spent nearly 7 1/2 billion dollars. Excluding Christmas Day and Sundays, this was an average of about 287 million dollars each business day, or approximately 36 million dollars for each working hour. Over 90 cents of every dollar spent in December went to pay war costs. According to the latest official estimates, Federal expenditures will run almost a fifth higher during the next six months than they have since last June. During the current fiscal year, the government will spend 57 billion dollars more than it will receive in taxes. The necessity of borrowing most of this sum will raise the national public debt onnext June 30 to around 200 billion dollars, or to practically one thousand, 500 dollars for each man, woman and child in this country.
In view of these astronomical figures, which dwarf our experience in any previous war, it is no small wonder that the American people have been asked to pay taxes which in many cases, I am sure, seem almost unbearable, and that the Congress is devoting its attention to raising still more revenue. In these times, we often find ourselves faced with two evils between which we must choose. We must fight the enemies of mankind or lose our freedom; likewise we must each of us pay our share of the tremendous cost of this war or suffer the much worse consequences of serious inflation.
The Constitution places upon the Congress the responsibility of determining the manner in which the revenue needs of the government should be met. Any suggestion that taxation become a political issue, or that tax policies either within the Congress, or within the Departments, be considered as such, must necessarily make it extremely difficult, if not impossible, to arrive at a constructive, or equitable tax program, particularly in time of war.
However, one must not lose sight of the fact that the power to tax carries with it the power to destroy; therefore, those of us charged with the responsibility of levying taxes would be derelict in our duty if we were blindly to accept and place our stamp of approval upon each and every Departmental proposal advanced.
In placing additional tax burdens upon the American people, especially at this time, Congress must give careful consideration to the existing tax burden on our people, the rapidity with which this burden has been increased in the past few years, and the effect additional burdens would have on our immediate and post-war economies.
Congress has, without stint, appropriated practically every dollar asked for by those charged with the responsibility of directing and prosecuting the war. The huge expenditures can only be met by taxation and borrowing. Everyone agrees that, without disrupting our economy, as much as possible of these expenditures should be paid for by taxation.
Few people, however, realize the extent of the increase in tax burden in recent years. Since 1940, Federal tax collections have risen approximately 600 percent. For the fiscal year 1940, total Federal tax collections amounted to 5 billion, 925 million dollars, whereas for the fiscal year 1944 they'will approximate 41 billion dollars.
In the period from 1936 to 1939, prior to the start of our defense and war programs, a married person with two dependents having a net income of 4 thousand dollars paid an annual income tax of 12 dollars. Today such an individual pays 484 dollars and 97 cents on the same size income. For the years 1944 and 1945, assuming no change in income, the tax will amount to 532 dollars and 22 cents because of the required payment of the unforgiven tax. This represents an increase of 520 dollars and 22 cents, or approximately 4 thousand, 335 percent.
A married person with no dependents and having a net income of 3 thousand dollars paid an annual tax of 8 dollars in the period 1936-1939. In 1940 his tax was increased to 30 dollars and 80 cents, an increase of 285 percent; in 1941 this tax was further increased to 138 dollars, an increase of 348 percent over the previous year; in 1942 it was further increased to 324 dollars, an increase for the year of 135 percent; in 1943 it was again increased to 405 dollars and 28 cents, a one year increase of 25 percent, making a total increase of 397 dollars and 28 cents or 4 thousand, 966 percent since 1939. If we include the unforgiven tax payable in 1944 and 1945 and assume no change in net income, this individual will be paying a tax of 445 dollars and 78 cents in each of these years, or an increase of 5 thousand, 472 percent over what he paid in each year from 1936 to 1939, inclusive.
Few persons realize that under the existing law, with the carry-over of the 1942 or 1943 tax required to be paid in 1944 and 1945, no individual, no matter how high his income, will have left more than $25,000, assuming his income remains constant and that his uncanceled tax is paid out of current income. When we give account, as we should, to Federal and State income, excise, and sales taxes, State property taxes and taxes of political subdivisions, it is obvious that the present Federal individual income tax is extremely burdensome. If the individual income tax rates recommended to the Congress recently by the Treasury Department had been adopted, no individual, no matter how high his income, would have left after taxes in 1944 and 1945 more than approximately 12 thousand dollars.
Within less than 3 months following the enactment of the 1942 Revenue Act, which was estimated to raise 7 billion, 952 million dollars of additional revenue, the Congress was advised by the President that we should collect not less than 16 billion dollars of additional funds by taxation, savings, or both, during the fiscal year 1944. This figure was subsequently reduced to 12 billion dollars, and when the Secretary of the Treasury presented his recommendations to the Committee on Ways and Means on October 4, 1943, it had been further reduced to 10 billion, 579 million, 300 thousand dollars; moreover, probably less than half of this sum would actually have flowed into the Treasury during the fiscal year ending June 30, 1944. Of the total amount the Treasury recommended that 6 billion, 528 million, 500 thousand be raised from individual income taxes, 1 billion, 138 million, 100 thousand dollars from corporate taxes, 401 million, 600 thousand dollars from estate and gift taxes, and 2 billion 511 million, 100 thousand dollars from increased rates of tax on existing selected excise taxes and the levying of new excise taxes on candy, chewing gum, and soft drinks.
Note that over 60 percent of the additional revenue recommended by the Treasury Department would have come from individual income taxes. Those of us who make it our business to keep closely in touch with many people in all walks of life realized immediately that the incomes of the great bulk of the American people could not stand this increase in tax. While many persons receive higher incomes as a result of the war, there are thousands of government employees, school teachers and professional people who are not enjoying one cent more than before the war. Most of these persons have patriotically invested in United States War Savings Bonds. If the tax rates proposed by the Treasury were to be adopted, many of these purchases would cease, or be curtailed, and probably insurance premiums and payments on mortgages could not be met by these persons.
The repeal of certain taxes which had been imposed previously by the Congress was suggested. These were: the tax on transportation of property, which brings in nearly 200 million dollars annually, and the Victory tax, which yields 3 billion, 500 million dollars a year. Repeal of these taxes would of course necessitate higher rates of other taxes in order to protect the revenue. The proposal for integrating the Victory tax with the regular income tax would have excused some 9 million persons from any income tax whatsoever. These persons now contribute about 300 millions dollars a year toward paying the cost of the war.
Many of us in Congress and elsewhere think that we have about reached the bottom of the barrel with respect to raising additional revenue from present sources of taxation. Possible new alternatives to which we might turn are compulsory savings, a tax levied only on incomes which have increased
as a result of the war, or a general retail sales tax. These have been consistently opposed. Hence the Congress has been unable to raise more than a fifth of the additional revenue recommended by the Treasury. There appears to be general agreement in the Congress that raising more than this amount, without resort to new methods, would disrupt our economy, not only for the present, but for years to come; moreover, we might make it extremely difficult for our returning soldiers to find employment.
In the bill recently reported out by the Senate Finance Committee, which will be considered in the Senate next week, changes in individual income tax provisions, higher rates of tax on corporations, and increases in excise and postal rates will bring in 2 billion, 275 million, 600 thousand dollars of additional revenue in a full year of operation.
The Senate Finance Committee bill retains the present rates of individual income taxes, with the exception that the Victory tax has been simplified by making it a 3 percent tax for everyone regardless of family status. The earned income credit is disallowed and the previously permitted deductions for certain Federal excise taxes paid are discontinued, with the result that income tax computations will be considerably simplified. The net effect of these changes is to raise 664 million, 900 thousand dollars of additional revenue spread throughout the income scale.
The Finance Committee did not adopt the Treasury Department's suggestion for raising the rate of tax which applies to the normal earnings of corporations, because it was felt that such a step would interfere with the normal distribution of dividends, which are already subject to double taxation and of which a large proportion is paid to individuals in the lower income groups. The rate of the excess profits tax levied on corporations is raised from 90 to 95 percent, and the credit allowed to companies using the invested capital method of computing excess profits tax is reduced at certain levels. In order to protect the smaller corporations, the specific exemption for excess profits tax purposes is raised from 5 thousand dollars to 10 thousand dollars. These changes, together with less important ones affecting corporation taxes, will bring in 502 million, 700 thousand dollars.
The bill reported out by the Senate Finance Committee will raise one billion, 108 million dollars from increases in the rates of certain excise taxes applying, in the main, to luxury items, and in postal rates.
The figures just cited add to 2 billion, 275 million, 600 thousand dollars, which at least in the past was considered to be a lot of money, lt still represents a considerable sum, although not as great as I believe should and could be provided if opposition to new methods could be overcome.
I think 1 can assure you that there is little opportunity for making inordinate profits out of war when corporate war profits are taxed at 95 percent and individual incomes are taxed by the Federal government alone as high as 90 percent, as will be the case under the Senate Finance Committee bill. I also want to assure you that the tax committees of the Congress, aided by their staff of experts, and by the Treasury Department, are giving serious attention to simplifying income tax computations for the more than 50 million taxpayers now on the rolls. Until greater steps can be taken toward simplification, it is hoped that you will bear with us and recognize the fact that it is difficult to achieve equity in taxation, especially under very high rates, without the introduction of provisions which are sometimes complicated merely because they are designed to fit special cases where hardship might otherwise result.
One further thing will interest you. The rates of certain Social Security taxes, now at one percent each on employers and employees, were scheduled to rise to 2 percent on January 1, 1944, but the Senate Finance Committee has frozen these rates at the one percent level. This action was taken on the basis of facts which indicated, in the opinion of the majority of committee members, that the amount of the social security funds now held in trust by the government is ample to meet prospective needs over several years without the increase in rates.
Unlike some measures passed by the Congress, tax legislation cannot hope to please either all the people some of the time or some of the people all the time but I have firm faith that each one of you stands ready and willing to meet your share of the cost of this costliest of wars. Many in Congress believe that an additional tax burden upon the same taxpayers of 8 billion dollars would shatter the public morale.