MEMORANDUM FOR THE PRESIDENT: 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.
CONCLUSION
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
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