Date 21 May 1943
Author unknown
Title Our Revenue Objective in the 1943 Bill
Description Staff memo, Division of Tax Research, Treasury Department
Location Box 64; Revenue program for 1943; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.
 
OUR REVENUE OBJECTIVE IN THE 1943 BILL

We need large amounts of additional revenue. The President's program of January this year called for an increase of $16 billion in fiscal year 1944 receipts. Nothing has happened since January to diminish our revenue requirements. Expenditures have not slackened. Excess purchasing power in the hands of consumers has not decreased. Income payments to individuals continue the trend upwards. The pressure against a limited supply of consumers' goods is increasing. Inflation is here. We face a difficult situation, one which will become more difficult unless we can agree on revenue objectives which are both adequate and acceptable to the Congress.

I.

Under the present law the liabilities for the income tax and net Victory tax are estimated at $9,815 million for the calendar year 1942 and at $14,716 million for the calendar year 1943. If the $16 billion requested in the Budget were to some entirely from income taxes and if the tax were put on a current payment basis, we would be taking $30.7 billion from this source during the fiscal year 1944. /1/ This is more than five times the collections from the income t ax during the fiscal year 1943.

The possibilities of enacting legislation to raise $16 billion of additional revenue in the fiscal year 1944 were dissipated by delays. In order to clarify the complications which have arisen from the delay in enacting the needed rate increases for 1943 and 1944, and the delay in initiating a pay-as-you-go system, I shall discuss three situations, which for convenience of reference I shall designate Cases A, B, and C.

CASE A - HYPOTHETICAL

If the revenue raising bill for 1943 had been passed by January 1, 1943 and a full pay-as-you-go system had been in force, then $16 billion of additional revenue could have been raised without retroactive taxes. The liabilities would have been collected currently. One-half of the $16 billion increase on 1943 incomes would have fallen into the fiscal year 1944. Assuming that the levels of income remained the same and that the rates were unchanged for 1944, the other $8 billion would have been received in the fiscal year 1944 out of 1944 incomes.

CASE B - HYPOTHETICAL

If the revenue raising bill for 1943 had been passed by July 1, 1943 and a full pay-as-you-go system had been in force, then again, our problem would have been relatively simple. The liability rates for 1943 could have been increased to raise $8 billion more out of 1943 incomes and a second but higher set of liability rates could have been adopted to raise $16 billion more out of 1944 incomes. It would have been possible to set the collection at source and other current payment rates high enough to bring into the Treasury during the first half of the fiscal year 1944 the entire 1943 increase of $8 billion. We could not have avoided retroactive increases in the liability rates for 1943, but the taxpayers would not have been called upon to pay currently during the last half of 1943 any more than in Case A above. As in Case A the government would have received the full increase of $16 billion in the fiscal year 1944, the only difference being that in Case A the government would also have additional receipts in the fiscal year 1943 and the taxpayer would, of course, have been subjected to the higher payment schedules one- half year earlier.

CASE C - THE PRESENT SITUATION

The present situation is not so favorable as either of the hypothetical situations discussed in A and B above. Assuming that we get pay-as-you-go by July 1, 1943, we cannot get the revenue raising bill until much later. It would be optimistic to count upon it by September 1, 1943. Even if we raise the liability rates for the calendar year 1944 by $16 billion, we shall collect only $8 billion in the fiscal year 1944. This leaves $8 billion to be collected in the last quarter of 1943. As in Case B the liability rates would need to be increased retroactively on 1943 incomes. This could be done, but it would not be practical to adopt a current collection at source and current payment rate high enough to bring the $8 billion additional receipts into the Treasury during the final quarter of 1943.

Even if we were to adopt the more reasonable course of spreading the $16 billion of additional receipts evenly over the three quarters of the fiscal year 1944 remaining after September 1, 1943, it would be necessary to increase the collections by $5-1/3 billion a quarter. This increase is at an annual rate of $21-1/3 billion. When this increase is added to the $14.7 billion, the estimated annual rate under the present law, collections during the final three quarters of the fiscal year 1944 would, in the aggregate, be running at an annual rate of $36 billion.

If less than $5-1/3 billion additional revenue were collected from 1943 incomes in the final quarter of that year, the annual rate of increase for 1944 would need to be higher than $21-1/3 billion and the collections during the last half of the fiscal year 1944 would in the aggregate be running at an annual rate in excess of $36 billion. For example, if the increase for 1943 were $4 billion, all collected in the last quarter, $12 billion additional revenue would need to be collected in the first half of calendar year 1944 to bring the total additional receipts up to $16 billion for the fiscal year 1944. The increase for 1944 would be at an annual rate of $24 billion. When this increase is added to the $14.7 billion, collections during the final half of fiscal year 1944 would in the aggregate be running at an annual rate of $38.7 billion. It may well be that, in the light of the then existing fiscal conditions, even these high revenue levels will prove to be inadequate for calendar year 1944. This letter step- up procedure has the merit of rationality, but it would not solve the immediate problem of gaining Congressional acceptance for an adequate revenue program.

II. The problem which confronts us becomes even clearer when these huge, amounts of revenue. are expressed in terms of percentages of the tax base. For present purposes and in the interest of simplicity of statement it is desirable to disregard the distinction between the income tax and the Victory tax and to assume that only the income taxpayers are subject to the Victory tax, although it is estimated that about 14 percent of the Victory tax is contributed by persons with incomes below the income tax exemptions, The surtax not income of individuals, that is, the taxable income after present exemptions, is estimated for the calendar year 1943 to be $51.2 billion. Of this amount, is estimated that $45.6 billion is the taxable income of civilians and $5.6 billion is the taxable income of the military personnel. The $14.7 billion income taxes estimated under present law represents an average rate of about 28.7 percent of the $51.2 billion base. If, as in Case A or Case B above, the revenue raising bill had been enacted before July 1, 1943 and the collections during the fiscal year 1944 were raised by $16 billion, then the total take of $30.7 billion would have constituted an average rate of nearly 60 percent of this base. If, however, it is correct to assume that the revenue, raising bill cannot be enacted before September 1, 1943, then the collections during the last three quarters of the fiscal year 1944 would need to be raised to an average rate of over 70 percent of the $51.2 billion taxable base if we are to crowd $16 billion of additional collections into the fiscal year 1944. These figures clearly demonstrate the extreme difficulties with which we are confronted in preparing an acceptable and adequate revenue program for the immediate future. It may well be too late to accomplish the objective set by the President in his Budget Message of January 6th. If so, it is important to establish without delay a new revenue objective, and to enact it. In this connection account should be taken of the fact that the fiscal situation has deteriorated considerably since January 6th. The delay In enacting revenue legislation makes the attainment of any revenue goal more difficult but more Imperative, if the economy is to remain stabilized. The rates, can be lowered, by decreasing the personal exemptions and credit for dependents. If, for example, the exemptions were lowered from $500 for a single person to $400 and from $1,200 for a married couple to $800 and from $350 for a dependent to $200, it is estimated that the taxable income base of all individuals could be increased from $61.2 to $67.0 billion. It would be necessary to collect during the last three quarters of the fiscal year 1944 at the average rate of nearly 54 percent of this new and higher base to raise the receipts in that fiscal year by billion. Even this picture is optimistic. So far, the tax base has included the income of the military personnel. If these incomes are excludes on the assumption that the additional receipts must come almost entirely from the civilian population, the tax base resulting from exemptions of $400-$800-$200 drops from $67 billion to $60 billion. Using the base of $60 billion which excludes the incomes of the military personnel, the collections during the last three quarters of the fiscal year 1944 would need to be at the average rate of 60 percent to bring $16 billion of additional revenue into the Treasury in that fiscal year. The great bulk of the taxable Income is in the lower income brackets, Of the $51.2 billion tax base for 1943, $36 billion represents the taxable income of individuals with incomes of less than $5,000 and only $15 billion is the taxable income of individuals in the higher brackets. When the collections needed to bring the, necessary receipts up to the required level constitute such a high percentage of the taxable base as any of the rates indicated above, a very substantial part of the overall additional burden must be borne by those in the lower income brackets. The lower income brackets will, however, continue to be shielded from any crushing burdens by the exemptions and by the operation of the progressive rate system. The figures used, above for the tax base relate to the calendar year 1943 and were estimated earlier in the year. If new estimates were prepared now for calendar year 1943, after allowing for price changes and the increased pace of income payments to individuals, the figures for 1943 would be higher. For 1944 the tax base would be still higher. The average rates needed to raise any given amount of revenue will be lower than those indicated above. Increases in the tax base resulting from price increases and other inflationary factors do not; however, make the problem under discussion much easier. It is easier to raise any given amount of revenue with a higher inflated tax base, but if the inflationary process is to be arrested and the higher revenue needs under these circumstances are to be met, we must progressively raise our revenue objectives. III. In the discussion so far, the increase which would result from the pay-as-you-go legislation has not been offset against the $16 billion. This amounts to about $3 billion. In a full year we may got a billion from the corporation income tax and even if we got another $3-1/2 billion from a sales tax in a full year, it would still leave about $10 billion to be raised In fiscal year 1944 from income and spending taxes, or from income taxes and compulsory lending combined, As explained above, this amount becomes magnified in its impact when we try to crowd the additional collections into the last three quarters of fiscal 1944. We will encounter exceptionally stiff opposition to further increases in the individual income tax rates. Several Congressmen, among them Senator George, have given clear indications that they would resist substantial increases in the individual income tax. They have indicated that the addition of the uncancelled 1942 liability to the current payments of a full year's taxes is probably all that can be expected of the taxpayer. It seems clear that, regardless of the source, it will not be possible to get the Congress to accept a program to raise the fiscal year 1944 receipts by as much as $16 billion. We need to re-examine our fiscal objectives in the light of the new circumstances and the delay occasioned by the pay-as-you-go controversy. The fiscal situation on puts a premium on size of the revenue. To get an adequate program accepted, we may need to modify our decisions on what we would like to put into it. We can get the Congress to pass a bigger program with compulsory lending than without it, but can we get substantially more? The more we resist compulsory lending, the more pressure there will be to pass a sales tax, but is the pressure for a sales tax already such as to make its enactment inevitable how far should we give on these issues in the interests of increasing the size of the program in the next bill? These are subjects which should be actively discussed in the Treasury by way of preparing our policy for the next bill.


Treasury Department, Division of Tax Research
June 9, 1943