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FOOTNOTE

/1/ "the required amount of saving could be insured by issuing to all consumers licenses to purchase only to the extent of the expenditures to which they were entitled; in the case compulsory saving would become Expenditure Rationing. Alternatively consumers might be required to pay a regular schedule of penalties for spendings above their exempt minimum; in this case compulsory saving would become a type of Expenditure Taxation. Further alternative sanctions for excess spending are criminal penalties, fines adjusted to the individual circumstances, or punitive compulsory lending requirements. The use of any of these last three sanctions, however, would involve great administrative difficulties and would cause widespread public resentment." (Letter of November 10, 1942 to Mr. Byrnes, p.14).

END OF FOOTNOTE

Short of compelling specified amounts of net savings from individuals any saving incentive plan will inevitably involve some withdrawal of income. Individuals differ widely in their spending habits. Incentives that will suffice to reduce the spendings of one individual to the desired level will not suffice for another. Savings inducement plans can, however, be constructed so as to involve much withdrawal of income or relatively little. For this reason it is impossible to give any very precise indication of the amount that would have to be obtained from a savings inducement plan in order to achieve the desired reduction in consumption. At the one extreme, it might be possible to achieve a $15 billion reduction in consumption while withdrawing perhaps as little as $5 billion. At the other extreme, almost as much might be needed as under withdrawal of income plans, that is $25 billion or $30 billion.

A progressive retail sales, a spending tax, and a combination of a spendings tax with a savings tax credit are examples of plans that rely primarily on incentive effect rather than on withdrawal effect.

1. A PROGRESSIVE RETAIL SALES TAX Various plans have been suggested for a progressive retail sales tax that would allow exemptions. Most of these plans involve the use of coupons. The exemption would be granted by distributing specified minimum amounts of charge. The progressive rates would be handled by selling, at successively higher prices, books of coupons to cover purchases in exemptions.

A major difficulty with this plan is the small amount of spendings which can be brought within its scope. It is not feasible to impose a retail sales tax on domestic service, professional service, rent, and other similar items. With total spending of about $70 billion, this means that the base would be net more than about $50 billion before exemptions. Exemptions reduce the base still farther. For example, suppose only $300 of free coupons were issued to cover expenditures of each adult and $150 for each child. This would involve the issuance of free coupons covering in the aggregate from 4217 billion to $30 billion of expenditures.

True, some of these coupons would go to persons whose expenditures were less than the exemptions. It would seem an almost insuperable administrative task to prevent the transfer by sale of these free coupons to persons whose spendings were larger than the exempt amount. Such transfers would be in the mutual interest of persons with larger spendings and of persons with smaller spendings. consequently, practically the whole of the free coupons should be deducted from what would otherwise be the base of the tax, leaving only $233 billion in the base.

With a base so small, there is little room for progression. Suppose the first rate bracket is made $300 for each adult and $150 for each child, or the same as the exemptions. This would involve first bracket coupons covering aggregate spendings of $27 billion or$30 billion -- more than the entire base. As with the exemption coupons, it would be to the mutual advantage of both parties for persons in the higher brackets to pay persons with spendings less than the first bracket to buy low bracket coupons for them. In the light of the administrative difficulties with a progressive retail sales tax, about the most that would be feasible would be a flat rate tax above exemptions.

With a base of $20 billion to $23 billion and a necessary reduction in consumption of $15 billion, a flat rate of 70 percent to $80 percent would be needed if each dollar of tax reduced spending by a dollar. Conceivably, a lower rate might do in view of the savings incentive effect of such high rates.

2. A SPENDINGS TAX

The spendings tax is a much more feasible incentive plan than a progressive rate retail sales tax. A spendings tax would be based on the total amount that an individual spends in any specified period. The amount he spends would be computed indirectly by computing the total funds at his disposal and subtracting all funds used for purposes other than current consumption -- for payment of insurance premiums, repayment of debt, purchase of war bonds or other assets.

Under the spendings tax it would be feasible to include all types of expenditures, service as well as commodities. The problem of trafficking in extra coupons would be entirely avoided. An individual who spends less than the spendings exemption would have nothing to transfer to other individuals. He would merely be subject to no tax. Consequently, the base of the spendings tax can be very much larger than the base of a progressive retail sales tax.

The amount of revenue that will have to be raised by a spendings tax designed to reduce spending by $15 billion depends on the extent to which the spendings tax will be paid out of money that would otherwise have been spent, or cut of money that would otherwise have been saved. Even though the spendings tax imposes a direct penalty on spendings, perhaps the most that can reasonably be expected is that a dollar of spendings tax will cut spendings by a dollar, i.e., the none of the spendings tax would be paid out of money that would otherwise have been saved. With an extremely progressive spendings tax employing high marginal rates, it is conceivable that spendings would be reduced by even more than the tax. With a relatively flat low rate spendings tax, spendings would be reduced by less than the tax. If we accept the tentative assumption that a dollar of tax will reduce spendings by a dollar, a spendings tax would have to be designed to raise approximately $15 billion from total spendings of about $70 billion.

Exemptions should be allowed under the spendings tax to protect minimum standards of living. If the exemptions were $400 for a single person, $800 for a married couple, and an additional $200 for each dependent, the total amount of spending covered by the exemptions would be in the neighborhood of $35 billion, or half of aggregate spendings. This would leave as the base of the spendings tax $35 billion, implying an effective rate of 43 percent on spendings above exemptions.

In view of the concentration of spendings in the lower brackets, such an effective rate could be achieved only by a schedule with relatively narrow brackets at the bottom, a relatively high initial rate, and step progression.

The following table shows for a married couple with no dependents the schedule that would be needed to reduce consumptions by the whole of the treasury $15 billion.


              Spendings tax schedule required to reduce
                     consumption by $15 billion

                   (Married couple, no dependents
     ______________________________________________________
          Spendings            Bracket        Cumulative
         brackets /1/          rates            tax

            0 - $  800            0               0   
          800 -  1,000           20%         $   40   
        1,000 -  1,200           40             120
        1,200 -  1,600           60             360    
        1,600 -  2,000          100             760
        2,000 -  2,400          150           1,360     
        2,400 -  3,000          200           2,560
        3,000 -  4,000          250           5,060     
        4,000 -  6,000          300          11,060
        6,000 - 10,000          350          25,060
       10,00 and over           400               -  
     ______________________________________________________

FOOTNOTE TO TABLE

/1/ For single persons, brackets will be half of those shown; for families with dependents, brackets will be wider than those shown.

END OF FOOTNOTE TO TABLE

Final liability under the spendings tax would not be determined until after the close of the year. It would be computed at the same time as the regular income tax and on the same form. The spendings tax would, however, be of little immediate value as an anti-inflation instrument if actual collection of the tax were delayed this long. Consequently, a substantial part of the tax should be collected currently during the year by (1) collection at source from income received in the form of wages and salaries, interest and dividends and (2) quarterly returns for persons with income from other sources and for persons in the higher spendings tax brackets.

3. SPENDINGS TAX COMBINED WITH SAVINGS CREDIT

Under the spendings tax alone an individual who reduces his consumption by the socially desired amount does not necessarily escape the tax. The spendings tax can be escaped entirely only by reducing spendings to the level of exemptions. But this involves a more drastic equalization of spending than is either necessary or desirable. Even the most progressive schedule of desired reductions in spending shown in Table 2, schedule C-1 permitted considerable inequality in spending. Under this schedule, spendings varies from an average of $616 for persons with income below $1,000 to an average of $4,000 for persons with incomes above $10,000.

Under a plan that is designed primarily to induce savings it seems reasonable than an individual who reduces his spendings to the degree desired, should escape all or most of the tax. This objective could be accomplished directly by a spendings tax with variable exemptions, the exemptions being higher the higher the income.

The same objective can be accomplished indirectly by combining the spendings tax with a credit for savings. For example, a flat 50 percent levy on spendings might be combined with a credit against the levy equal to 25 percent of the amount of savings. With these rates if an individual spent on consumption goods 1/3 of his income, the net spendings tax would be zero. The tax on his spending would be 50 percent of 33-1/3 percent, or 1/6 of his income. The credit for savings would be 25 percent of 66-2/3 percent, or also 1/6 of his income. This is equivalent to a spendings tax on 75 percent on spendings in excess of an exemption of 1/3 of income.

The plan would be more acceptable if the percentage of income exempt declined as income rose, that is, if the spendings to be permitted without the payment of the tax were a smaller percentage of a larger income than of a small income. This objective can be accomplished by using a graduated spendings tax instead of a flat rate spending tax while keeping a flat rate credit for saving.

With a 25 percent credit for saving, the following spendings tax schedule is a rough guess of a schedule that would be sufficient to accomplish the desired reduction in consumption.


             Spending tax schedule to reduce consumption
            by $15 billion, if combined with a 25 percent
                         savings credit /1/

                   Married couple -- no dependents

     _____________________________________________________________
     Spendings brackets /2/      Bracket rate     Cumulative Tax    
                                  (percent)
     _____________________________________________________________

            0 -    800                0                0
          800 -  1,000               25               50
        1,000 -  1,200               40              130
        1,200 -  1,400               50              230
        1,400 -  1,600               60              350
        1,600 -  1,800               70              490
        1,800 -  2,000               80              650
        2,000 -  2,400              100            1,050
        2,400 -  3,000              120            1,770
        3,000 -  4,000              150            3,270
        4,000 -  5,000              200            5,270
        5,000 -  7,000              300           11,270
        7,000 - 10,000              400           23,270
       10,000 and over              600               --
     _____________________________________________________________

FOOTNOTES TO TABLE

/1/ Savings is the amount by which net income exceeds the sum of spendings, the income tax and the Victory tax.

/2/ For single persons, brackets would be half the size of those shown; for families with dependents, brackets would be wider than those shown.

END OF FOOTNOTES TO TABLE

The spendings that could be made at various income levels without the payment of tax under this particular schedule are as follows:


        Spendings that could be made without payment of tax,
                under Plan A for selected net incomes

                   (Married couple, no dependents)

     Net income after        Spendings        Associated
        income and            possible         savings
       Victory tax        without tax 
               
        $  800             $  800             $    0
           900                850                 50
         1,000                900                100
         1,200              1,000                200  
         1,400              1,077                323   
         1,600              1,154                446
         1,800              1,227                573 
         2,000              1,293                707
         2,500              1,453              1,047
         3,000              1,600              1,400
         4,000              1,857              2,143
         5,000              2,080              2,920
         6,000              2,280              3,720
         8,000              2,641              5,359
        10,000              2,986              7,014
        12,000              3,274              8,726
        15,000              3,703             11,297
        20,000              4,324             15,676
        30,000              5,302             24,698
        50,000              6,840             43,160
       100,000              9,819             90,181
       250,000             15,877            234,123

This type of plan permits a very strong savings inducement with relatively small withdrawal of income. For every dollar that an individual reduces his consumption, he gains in two way. First, he saves the spendings tax on that dollar and second, he gets a credit of an additional 25 cents for the extra dollar of savings. Consequently, with an initial spendings tax rate of 25 percent, the marginal effect is at a 50 percent rate since an additional dollar of savings will save 25 cents in tax and add 25 cents to the savings credit.

Another modification of the plan that might be desirable would be to give a credit only for savings in excess of some minimum standard, since there seems little reason to give a credit for savings that would be made in any event. In line with the war bond saving campaign the minimum standard might be made 10 percent of net income in excess of exemptions. The savings credit might then be made 25 percent of savings in excess of this minimum standard. With this modification and with the same schedule as before, the spendings that could be made without the payment of tax would be lower since the credit against the spendings tax would be less. Consequently, a somewhat lower schedule would have the same consumption reducing effect. The amount of spending that could be made without the payment of the tax would, however, be lower than under the first plan. With a 25 percent savings credit of this type, a tentative schedule to accomplish the desired reduction in consumption, as the spendings that could be made without the payment of tax, follows:


                Schedule for savings over 10 percent

             Plan B -- Spendings tax schedule to reduce
           consumption by $15 billion, if worked with a 25
             percent credit for savings /1/ in excess of
           minimum savings (10 percent of net income after
           income and Victory taxes and other exemptions)

                   Married couple -- no dependents

     Spendings brackets /2/      Bracket rate     Cumulative Tax    
                                  (percent)

    $     0 -  $   800                   0                 0
        800 -    1,000                  20                40
      1,000 -    1,200                  30               100
      1,200 -    1,400                  40               180
      1,400 -    1,600                  50               280
      1,600 -    1,800                  60               400
      1,800 -    2,000                  70               540
      2,000 -    2,400                  80               860
      2,400 -    3,000                 100             1,460
      3,000 -    4,000                 140             2,860
      4,000 -    6,000                 200             6,860
      6,000 -    7,000                 300            12,860
      7,000 -   10,000                 400            20,860
     10,000 and over                   550                --

FOOTNOTE TO TABLE

/1/ Savings are equal to the excess of net income over the sum of spendings, the income tax, and the Victory tax.

/2/ For single persons, brackets would be half the size of those shown; for families with dependents, the brackets would be wider than those shown.

END OF FOOTNOTES TO TABLE


                Spendings that could be made without 
                  payment of tax under Plan B, for
                       selected income levels

                   Married couple -- no dependents
_____________________________________________________________________
     Net income          Spendings        Associated      Associated
    after income         possible         savings        excess over 
     and Victory          without                          minimum
         tax                tax                            savings
_____________________________________________________________________
       $     800          $  800           $      0        $     0 
             900             845                 55             45 
           1,000             890                110             90
           1,200             980                220            180
           1,400           1,064                336            276      
           1,600           1,145                455            375
           1,800           1,220                580            480
           2,000           1,280                720            600
           2,500           1,430              1,070            900
           3,000           1,580              1,420          1,200
           4,000           1,821              2,179          1,859
           5,000           2,044              2,956          2,536 
           6,000           2,224              3,776          3,256
           8,000           2,584              5,416          4,696
          10,000           2,944              7,056          6,136
          12,000           3,217              8,783          7,663
          15,000           3,603             11,397          9,977
          20,000           4,191             15,809         13,889
          30,000           5,132             24,868         21,948
          50,000           6,517             43,483         38,563
         100,000           9,278             90,722         80,802
         250,000          14,191            235,809        210,889

It should be noted that under a plan combining a spendings tax
with a savings credit, two person who spend the same amount in a
given year but we have different incomes, would pay different amounts
of tax, the person with the larger incomes, would pay different
amounts of tax, the person with the larger income, and hence the
larger savings, paying the smaller tax. This could be justified on
the grounds that there are two aspects to the reduction of
consumption, first, the final level of consumption, and second, the
extent of curtailment from former levels. The spendings tax part of
the plan is geared to the absolute amount of spending, imposing a
heavier tax the higher the amount of spending, regardless of former
levels. The savings credit aspect of the plan takes into account the
extent of curtailment and rewards the individuals who reduce
consumption by the largest percentage.

Even though with the same spending this new tax would decrease
as income increased, in any case, the retention of the present income
tax would insure that total taxes paid -- income tax and the new levy
-- would increase with increasing income.

While the payments made by individuals to the Government under a
plan of this type could conceivably be treated either as a tax or a
compulsory loan. much of the effectiveness of the plan in curtailing
consumption would be destroyed unless it were made a tax not to be
returned.

As under the spendings tax current collection of this tax could
be accomplished by a combination of collection at the source and
quarterly returns. Collection at the source would be somewhat less
desirable than under the spendings tax alone since if the individual
spends no more than the desired amount, he would be subject to no tax
and the whole amount collected at source would have to be refunded to
him. This involves no serious burden. Suppose, for example, the
collection at source from income were at the first bracket spendings
tax rate of 25 percent of income in excess of exemptions. At all
levels the individual, in order to pay no tax, must have more than 25
percent of the excess of his income over exemptions. If his spendings
are sufficiently low so that he saves this amount, he will have no
current need for the money collected at source, unless he has
extremely heavy fixed savings commitments. What is collected at
source will in effect be a particular form of savings -- in the form
of a Government liability to repay the amount collected. The extra
amount collected could be refunded in the form of a Government bond.

Quarterly returns would in any even have to be used for the
higher spendings brackets and it might conceivably be desirable to
rely exclusively on quarterly returns.