|TAXES NEEDED DURING FISCAL 1943 TO CONTROL INFLATION
During fiscal 1943, persons in the United States will be receiving at least $112 billion income, even if prices do not rise and wage rates remain unchanged. This total includes net profits of business, after subtracting all taxes other than social security taxes paid by business. These taxes total $16.5 billion ($11 billion to the Federal Government, $5.5 billion to States and localities) under the existing system. If we subtract another $3 billion of business taxes to be expected from the pending revenue act, the national income will be $109 billion.
Out of this $109 billion, $9.5 billion will have to be paid in individual, direct taxes under present law ($6.5 to Federal, $3.0 to States and localities). This leaves $99.5 billion of disposable income; i.e., income available for saving and spending. If we subtract another $6 billion individual taxes to be expected from the pending revenue act and social security legislation (assuming all taxes are in effect by July 1, 1942, and that withholding at the rate of 10 percent begins on July 1, 1942), there is $93.5 billion available for saving and spending.
Perhaps about $2.5 billion of this disposable income will be held by corporations as undistributed profits. Hence individuals will have about $91.0 billion disposable income, that is, income to spend or save, if both the pending revenue act and the social security legislation are passed promptly.
Individuals, with this $91.0 billion to sped or save, will find available no more than about $64.0 billion of consumers goods. Even this low amount will not be available unless, as is assumed here, business concerns, as a group, aid consumers by letting inventories run down and plan and equipment deteriorate to the extent of $1.5 billion.
Is it reasonable to expect that consumers with $91 billion of disposable income will voluntarily save $27 billion of it? Evidently not, except that under universal and completely effective price fixing, with rationing, consumers could find nothing to spend their $27 billion on, and hence would "voluntarily" save it. The pressure to spend would be great enough, however, to break through any price control and rationing plan that could be devised without using a policing force so large as to constitute a serious drain on manpower for industry and the armed forces. Very few individuals, receiving in the aggregate but a small proportion of the disposable income, would voluntarily save almost one dollar out of every three they receive.
The result would seem inevitably to be that consumers would push their spendings up through the $64 billion level, which means they would push prices up correspondingly. The initial break through would be followed by further advances as the sellers respect their profits, as workers got higher wages based on the new high levels of profits, and so on.
How much could the consumers be counted on to save voluntarily, while spending only $64 billion? Under more normal conditions, they might be expected to save $7 billions. But conditions are not normal; some of the abnormalities make for less saving (e.g., the fact that a larger part of the disposable income is going to low-income groups than in a peace-time period with a comparable volume of civilian- goods output); some make for more saving (e.g., the payroll deductions to purchase Defense Bonds). And a universal freezing of retail prices, even with only a skeleton police force, would induce somewhat more saving than normally, at least for a while; some consumers would prefer to go without (and some dealers would renounce windfall profits) rather than violate the price-fixing law.
All in all, it seems unwise to count on more than $10 billion of savings to go along with $64 billion of consumer spending.
During fiscal 1943, then, consumer disposable income will be about $91 billion in the absence of a rise in wages and prices; consumer goods available at January, 1942 prices, about $64 billion; and voluntary savings to accompany such a volume of expenditure, about $10 billion. It follows that there is a gap of $17 billion. This is a "gap" in the sense that $17 billion of consumer disposable income must be prevented from coming into existence. If it did come into existence, it would be in part spent, thus creating still more money income, and so on. Consequently, $17 billion more in individual income taxes are needed in fiscal 1943, in addition to the $9 billion extra taxes now contemplated, if the January, 1942, price level is to be maintained. Seventeen billion dollars is the appropriate figure only if the extra funds are raised by individual income taxes of a progressive type. Somewhat more than this amount would be needed if any substantial part of the extra funds were raised by compulsory savings, since, in that case, voluntary savings would probably be less than the $10 billion assumed in the above calculations. Individuals are likely to reduce voluntary savings by a larger amount if part of their income is withdrawn in the form of compulsory savings than if it is withdrawn in the form of taxes. A program involving a substantial amount of compulsory savings might, therefore, have to total about $20 billion -- rather than $17 billion -- to maintain the January, 1942, price level.
But that price level has already been passed. For that reason, and also because of the great taxing effort needed to keep prices from rising at all, it might be advisable to aim at a program that would allow a rise in the cost of living of some 5 percent a year. To do so would decrease the $17 billion tax requirement to about $14 billion.
Moreover, it is not necessary that the $14 billion be coming in as early as July, 1942. The inflationary pressure that it reflects is an average for fiscal 1943. In these times, an average for a period as long as a year can be dangerously misleading, so frequent are changes of great magnitude. For example, the CHANGE in the annual rate of defense spending in the three months from September, 1941, to December 1941, was only a billion dollars less than total Federal expenditures for the year 1938. Further, tax receipts will not be coming in smoothly during the fiscal year. Even under existing law, tax receipts will be considerably higher in the last two quarters of fiscal 1943 (January-March, and April-June, 1943) than in the first two quarters because of the higher level of business during calendar 1942 than during calendar 1941. The increase in rates embodied in the pending revenue act will intensify this difference, and the provision that half of all individual income tax liabilities be discharged by March 15 will lead to a bunching of tax collections in the January- March quarter.
Under these conditions, to say that some $14 billion of added tax revenue is needed in fiscal 1943 is much too crude a statement for purposes of formulating policy. A somewhat smaller flow of tax revenue will suffice for the July-September, 1942, quarter; a some- what larger flow (than the $14 billion annual rate) will be needed in the April-June, 1943, quarter.
In order to estimate tax needs by quarters, the estimated total of war spending for fiscal 1943 -- budget total of $53 billion plus an estimated $3 billion from Government corporations, or $56 billion -- was distributed somewhat arbitrarily among quarters. Similar quarterly estimates were made for the other data underlying the estimated tax needs. The key figures, and the tax estimates, are shown in Table 1 in terms of annual rates.
The estimates, given in the last column of the table, yield a striking seasonal pattern. In order to prevent cost of living from rising by more than 5 percent per year, approximately $11-1/2 billion additional taxes would be needed in the July-September, 1942, quarter. The growing tide of armament expenditure, combined with stable receipts from existing or pending taxes, raise tax needs to about $16-1/2 billion in the next quarter, October-December, 1942. The sharp increase in receipts from current and pending taxes after the turn of the year more than offsets the increase in inflationary pressure, reducing tax needs for the January-March, 1943, quarter to $11-1/2 billion, or the same amount as for the July-September, 1942, quarter. The continued increase in armament spending, the slackening in the assumed rate of increase in national income, and lower collections from existing and pending taxes, combine to raise tax needs for the final quarter of fiscal 1943 to the same level as for the October-December, 1942, quarter, or $16-1/2 billion.
These quarterly estimates are crude, and the exact magnitudes cannot be trusted. but the zigzag pattern of tax needs that they indicate, although perhaps overstated, seems entirely reasonable.
The indicated decline in tax needs from the October-December, 1942, to the January-March, 1943, quarter is probably of little practical importance since it is premised on the armament program contained in the President's Budget. It now seems likely that this program will be raised. Such an increase in the program is not likely to increase actual expenditures substantially until near the end of calendar 1942 so that estimated tax needs for July-December, 1942, will be little affected. But tax needs for January-June, 1943, are likely to prove considerably larger than is indicated by our estimates. A tax program adequate for the period from July to December, 1942, is, therefore, not likely to prove too large thereafter.
Our estimates of goods available to consumers suggest that an expanded armament program is entirely feasible. For the entire fiscal year 1943 out estimates imply an average level of PHYSICAL CONSUMPTION PER CAPITA about the same as in 1935 or 1936. Since the volume of consumer durable goods will be much smaller than at that time, the volume of non-durable goods will be considerable larger than in those pre-war years.
Moreover, the quarterly estimates reveal an almost constant level of consumption. Converting the estimates in the table into estimates in terms of constant prices--the prices assumed to be ruling in the July-September, 1942, quarter--yields the following annual rates:
July-September, 1942 69.5 October-December, 1942 68.6 January-March, 1942 69.2 April-June, 1942 66.4
Statistical crudities and errors probably account for the slight rise between the second and third quarters, but not for the mildness of the decline throughout the year. According to these figures, the armament program in the President's Budget does not involve any increasingly drastic curtailment in civilian consumption during fiscal 1943 -- fairly clear evidence that a considerably larger program is economically feasible.
TABLE I PART 1 ESTIMATES OF TAX NEEDS BY QUARTERS (All figures are annual rates in billions of dollars and assume a rise of 5 percent a year in the cost of living) National income Federal Income of Quarter (under existing defense individuals taxes spending before taxes July Sept., 1942 112 48.0 107 Oct.-Dec., 1942 117 54.0 112 Jan.-March, 1943 120 59.0 114 April-June, 1943 122 63.0 116 Average, fiscal 1943 117.75 56.0 112.25 (TABLE I CONTINUED PART 2) Consumer Quarter goods Voluntary Total available savings July Sept., 1942 69.5 11.5 26.0 Oct.-Dec., 1942 69.5 11.5 31.0 Jan.-March, 1943 71.0 11.5 31.5 April-June, 1943 69.0 11.5 35.5 Average, fiscal 1943 69.75 11.5 31.0 (TABLE I CONTINUED PART 3) Taxes from individual income Existing Pending Additional Quarter taxes /a/ revenue /b/ amount program needed /c/ July Sept., 1942 8.0 6.5 11.5 Oct.-Dec., 1942 8.1 6.5 16.4 Jan.-March, 1943 10.9 9.2 11.4 April-June, 1943 11.0 8.0 16.5 Average, fiscal 1943 9.5 7.5 14.0
FOOTNOTES TO TABLE
/a/ Estimated collections, Federal plus State and local; excludes business taxes other than social security taxes; includes excess of social security collections over disbursements.
/b/ Estimated equivalent of pending bill in terms of taxes from individual incomes; actual receipts will be larger; includes taxes withheld but not remitted to Bureau by withholding agents.
/c/ Estimated collections needed, assuming additional taxes take the form of individual income taxes with exemptions.
Treasury Department, Division of Tax Research
April 13, 1942