Date 9 September 1942
Author unknown
Title Memorandum for the President
Description Staff memo, Division of Tax Research, U.S. Treasury Department; prepared in response to presidential request.
Location Box 1; General Sales Taxes; 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.

You requested an answer to the following question:

"Why can't a person go to the post office and buy, say, $600 worth of stamps with which to buy goods? The first $600 worth would be exempt from taxes; then you buy $600 more and on that you would pay 10% and for each additional $600 you would pay a higher tax."

This plan, if it could be made effective, would remove two of the principal objections to a sales tax, It would be imposed at progressive rates and would provide the equivalent of personal exemptions.

The effective operation of the plan would encounter serious difficulties:

1. Careful and costly registration would be required to prevent persons from obtaining more than one tax-free set of stamps. Some multiple registration could not be prevented.

2. It would be extremely difficult to prevent trafficking in unused stamps. Persons with large incomes and relatively large expenditures would benefit by purchasing stamps from those with lower incomes and lower expenditures, who could obtain stamps at relatively lower prices.

3. Retail purchases made by business concerns would have to be exempted, to prevent the tax from exerting a pressure against price callings. This would complicate tax administration and would create opportunities for evasion.

4. A continuous check would be required on retailers to insure the collection of the stamps and to prevent retailers from selling stamps collected from purchasers instead of turning them over to the tax-collecting agency.

5. The necessary that they have on hand at all times sufficient stamps to cover their purchases, including purchases made on credit, would be an inconvenience to taxpayers.

6. Responsibility for the distribution of stamps would impose a further burden on an already overburdened postal system.

If it could be administered effectively, a progressive tax on purchases utilizing the stamp system would have distinct advantages over the usual type of sales tax, and in time of war would provide a desirable progressive addition to the tax system. However, so long as these administrative problems remain unsurmounted, its objectives can be obtained more effectively by a graduated spendings tax.

A suggested plan for a progressive sales tax

"Why can't a person go to the post office and buy, say, $600 worth of stamps with which to buy goods? The first $600 worth would be exempt from taxes; then you but $600 more and on that you would pay 10%, and for each additional $600 you would pay a higher tax."

This plan involves essentially a progressive tax on expenditures beyond a certain minimum figure. With appropriate tax rates, the same revenue could be obtained as from a spendings tax, and substantially the same anti-inflationary effects. The psychological effect is discouraging spending might be greater than it the case of the spendings tax, since persons would have to pay the tax premium before they spend additional amounts instead of after spending.

From the standpoint of administration, however, the plan would involve serious difficulties and require substantial personnel for its operation. The principal sources of difficulty are indicated below.

1. In order to prevent persons from getting the $600 of tax- exempt stamps more than once, or more than one set of stamps at any tax rate, a careful registration of all persons would be necessary as well as the issuance of registration cards which would be presented and punched for appropriate amounts each time stamps were purchased. The task of registration would require a substantial personnel force. Some multiple registration would be almost inevitable without a universal fingerprint system. With such a system the task of checking all registration blanks would be substantial.

2. It would be virtually impossible to prevent transfer of unused stamps from some individuals to others. Persons having low income and spending relatively little would profit by buying additional stamps and selling them to persons having large incomes and spending relatively large amounts.

3. The task of selling the stamps would add to the burden of the post offices, already short of personnel.

4. Careful check on retailers would be necessary. Retailers would tend to sell goods for cash instead of stamps and to resell stamps which they had received, instead of turning them in to the Government. Only by careful audit of retailers' records could these two practices be checked. The audit would need to be even more careful than that required for a retail sales tax.

5. Difficulties would arise in regard to purchases by business concerns. It is essential that such concerns be freed of the tax because of the progressive rate. To allow all purchases by business concerns to be made with cash would create serious problems, because at time of sale it is difficult for the retailer to ascertain the actual ultimate use of the article. Likewise, since many sales to businesses are made by concerns selling also to consumers, audit difficulties and chances for evasion would be increased greatly.

The other possible procedure would be to allow business firms to exchange unlimited amounts of money for stamps without tax. This procedure would require extensive personnel to handle and check the requests for exchange. Furthermore, extensive evasion would arise through resale of the stamps by businesses, or use of the stamps by business firms for consumption purchases by the owners.

6. Considerable inconvenience for consumers would result. Either two types of checking accounts would be required or persons would have to make all purchases in cash. Small denomination coupons would be far loss convenient than the present coins.

Inconvenience could be reduced in some respects by the use of the stamps as a supplement to money instead of as a substitute for it. Persons would receive a certain number of stamps free and could purchase additional at progressively higher tax rates. The stamps would be required along with cash at time of purchase. All other difficulties would remain, however, with this method.


In general, it is recognized that this plan, if operated efficiently. would serve as an effective anti-inflationary force. However, the difficulties of operation and the necessary personnel would be very much greater than those of a spendings tax. The spendings tax could accomplish substantially the same results in a far easier, less expensive, and more convenient manner.

September 12, 1942