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
|