|PROPOSAL FOR A "CONSUMPTION EXPENDITURE
 A tax on personal consumption expenditure, imposed in connection with the personal income tax, is administratively practicable. The administrative and compliance costs of such a tax would not be excessive because (1) a collection framework, and nearly adequate personnel, already exist in connection with the personal income tax, and (2) most of the information required from taxpayers is in any case needed by them in making out the personal income tax return. On the assumption that further increases in income tax rates are not politically feasible, the spendings tax appears to offer the best substitute. For reasons indicated below, indeed, a spendings tax might be a better solution than further increases in income tax rates. On economic and administrative grounds, a spendings tax is preferable to a sales tax that would yield an equivalent revenue.
 The base of the spendings tax would be the annual expenditure by individuals on durable and nondurable consumption goods and services. Exemptions similar to those under the income tax would be granted in order to take account of varying income and dependency status, and to simplify administration. The rate of the tax might be flat or graduated, according to principles to be discussed later; but in any case a base rate of 10 percent (except possibly in the lowest taxable bracket) would be necessary in order to achieve a yield of around $2 billion. With graduated rates definitive liability under the tax would be difficult to ascertain until after the end of the taxable year; but it would be possible to collect a flat amount on the basis of, say, bi-monthly reporting of spending.
THE EXPENDITURE CONCEPT
 Individuals cannot be expected to report expenditures directly. Both compliance and audit are much easier if spending is derived indirectly from two concepts, (1) FUNDS AVAILABLE FOR EXPENDITURE during the taxable year, and (2) NON-TAXABLE USE OF FUNDS during the same period. The taxpayer starts by listing all cash receipts, regardless of their source. From their total he subtracts the sum of all outlays which for one reason or another are exempt from the spendings tax. The difference is his taxable expenditure. This figure properly includes spending from many receipt items not subject to the income tax. Examples are tax-exempt interest, gifts, the entire amount of insurance benefits, conversion of capital assets into consumers' goods, and new borrowing. It is clear, therefore, that for many taxpayers the spendings tax bears only an approximate relation to the income tax. That fact should be emphasized in countering the objection that the spendings tax is merely an additional income tax in disguise.
 It is easier to bring together the various sources of funds available for expenditure that it is to establish agreement on allowable deductions. In many cases a difference of opinion can exist as to whether an item should be regarded as taxable spending and issue might be taken with the conclusions of this memorandum. For example, some might argue that fines and penalties ought to be considered taxable spending; again, a portion of a life insurance premium involves payment for current protection, and therefore could be regarded as properly taxable. A difficult problem is that of imputed rent of owned homes. On grounds of equity it is arguable that if imputed rent cannot be taxed in full, rent paid by renters ought not to be included fully in the spendings tax base. It is recommended here that rent be included, and as much of the home expenditure of the home-owner as it is administratively feasible to tax.
 A difficult item to handle is DURABLE CONSUMERS' GOODS. These comprise various amounts of saving, since they release their utilities slowly over time. In most durable consumer's goods the consumption aspect clearly predominates, and only an owner-occupied dwelling contains a sufficient element to saving to render it desirable to treat the act of purchase as saving rather than as consumption. An attempt is made to tax the consumption element by including certain items of owner outlay in the spendings tax base.
 On certain other issues agreement is easier to reach: 1. Gifts to individuals outside the family are not a consumption expenditure by the donor. They should be taxed under a spendings tax to the donee at the time the donee converts the cash into consumers' goods. If the donee converts the cash into a capital asset or keeps the gift in the form of cash, a compensating deduction item arises, and no tax liability ensues. 2. If rent is included in the tax base, it then because clear that property taxes, mortgage interest, and other home expenditures of home-owners ought likewise to be included in the base. But interest on other types of debt should be excluded because it does not constitute consumption expenditure. Similarly, the repayment of debt is an allowable deduction provided it is paid in cash, thereby actually reducing "funds available for expenditure." 3. All taxes other than business taxes and taxes on an owned home are deduction items because, though they may be considered payments for services, they are involuntary, and are unrelated to the type of spending which it is desired to tax under the spendings tax. 4. Insurance premiums involving current protection represent taxable expenditure, with the earlier-mentioned exception for life insurance necessary on administrative grounds.
THE INDIVIDUAL EXPENDITURE TAX RETURN
 The figure for taxable expenditure can be calculated most simply by totaling 11 cash receipt items and subtracting the total of 10 deduction items, as follows:
COMMENTS ON ITEMS IN THE "INDIVIDUAL EXPENDITURE TAX RETURN"
 Item 1, taken in conjunction with Item 14, indicates indirectly the amount of spending which has been made by net reduction of cash and bank balances.
 Items 2 to 8 include in general the various types of income which an individual receives. It will be noted that they are offset under "Deductions" unless they are used to buy consumers' goods and services subject to the expenditure tax. Receipts should be reported net of all withholding at the source.
 Item 7 relates to withdrawals, not to profits and losses. If an individual withdraws cash from his business, it is available for spending, regardless of whether the business made a profit during the year in question. Amounts not withdrawn are not deductible under any of the deduction items; otherwise a proprietor could offset his spendings by subtracting his business profits in the form of, say inventory.
 The reason it was thought undesirable to start from income as reported for the income tax is apparent from Items 4, 6, 7, and 8. To some extent these items are income subject to the income tax, and to some extent they are not; consequently it is awkward to attempt to work for either "Total income" or "Net income" under the income tax. These items must, of course, be included under the spendings tax in order to ascertain spending.
 Items 9 and 10 include the value of consumer goods and services in order to prevent direct exchanges for purposes of expenditure tax avoidance.
 Borrowing (Item 11) is included because it represents an addition to available purchasing power. An offsetting item appears when the loan is repaid. An incidental advantage of this method of treatment is that those with heavy debts can reduce their expenditure tax base by repayment (Item 21).
 The full value of goods bought on the installment plan is taxable at time of purchase. This appears to be no hardship in a period when not many durable goods are available; and to the extent that it discourages installment buying it is anti-inflationary in effect. In normal times, and with graduated rates, the requirement that the spendings tax be paid on the entire value of the commodity in the year of purchase might throw taxpayers into a higher spending tax bracket than would be the case if they paid the tax concurrently with installments.
 Interest included in the price of a commodity purchased would not be taxed under the spendings tax if separately quoted.
 Item 16. Interest payments on a mortgage on an owned home are included in the spendings tax base. Under the proposed treatment of spendings the entire rent of a renter is subject to the tax; it is therefore desirable to include that part of the outgo of a homeowner which it is administratively feasible to tax. Interest paid on business debts would not be deductible because it did not enter into the tax base in the first place.
 Item 17. All Federal, State, and local taxes ought to be deducted from the base except taxes on owner-occupied homes. The reason for their inclusion is the same as that under Item 16. Business taxes would not be deductible because they do not enter into "Funds available for expenditure."
 Item 18. Some disagreement exists with respect to the exemption of "Fines and penalties" from the spendings tax base. They are deducted here because they are not voluntary expenditure in the usual sense of "expenditure" (incidentally, of course, much so-called voluntary expenditure is involuntary because it is dictated by necessity, custom, etc.), and because the actual burden of a large fine can become inordinate if both the income and spendings taxes are highly graduated.
 Item 19. By regarding a home as a capital asset we exclude its purchase from the spendings tax base. Part of the purchase price may get in subsequently through the inclusion of interest on the mortgage. Repairs on a home are not regarded as a capital asset.
 Item 21 has been commented on in connection with Item 11.  Item 23 is a basket item.
ADMINISTRATIVE PROBLEMS CONNECTED WITH THE SPENDINGS TAX
1. THE TAXPAYER UNIT
 Since spending is made on a family basis only one spendings tax form should be made out for each family. This should be done whether or not joint returns are adopted for the income tax.
2. ADDITIONAL ADMINISTRATIVE COST
 The addition to the cost of administering the income tax made by the introduction of a spendings tax ought not to be very great. For the majority of taxpayers many of the items on the spendings tax form would not apply, and checking would therefore be relatively easy.
3. SIMPLIFIED RETURNS
 Much time can be saved both the taxpayer and tax auditors by the use of simplified returns for those in low taxable spending brackets. Presumptive expenditure would be estimated for individuals with different income and dependency situations. A disadvantage of the simplified spendings tax return is that no incentive is offered the taxpayer to reduce spending.
4. FILING REQUIREMENT
 If exemption and deduction, for dependents were the same for the spendings tax as for the income tax, some individuals would not be required to file an income tax return whose spending exceeded the exemption under the spendings tax. If the two tax forms are to be combined it is recommended that the filing requirement be modified to read "having gross receipts from all sources, gross income, or a total expenditure, during the taxable year, of" the sum specified, and that the filing requirement be the same for both taxes.
5. INFORMATION RETURNS
 Although actual withholding of a portion of all payments made to individuals is not feasible, the enforcement of the spendings tax can be strengthened by requiring rather extensive reporting of money payments. The following suggestion has been made in a memorandum by Messrs. Vickrey and Groves: "It is recommended that in addition to the information returns now required and those which will be required under the income tax law as amended, an information return be required with respect to all payments, other than wages and salaries, in excess of $500 made to individuals or partnership by other than banks and building and loan associations; that insurance companies be required to return information covering all payments to policyholders or claimants (excluding dividends of less than $100 per year); and that banks, building and loan associations, trust companies, and brokerage houses be required to return changes in balances held or owed by individuals or partnerships where such changes from one year's end to the next exceed $100."
 Information returns of this sort unfortunately cannot be entirely effective because (1) the necessity on administrative grounds of excluding small payments from the reporting requirement provides the opportunity for an enormous number of leaks, and (2) even if such payments are reported, the Bureau of Internal Revenue could never take the time to examine such a large number of transactions.
6. ANTICIPATORY BUYING
 In view of the fact that spendings tax rates would be fairly high (say 10%) in the lowest tax brackets, and that the tax would be graduated, anticipatory buying is likely to prove a serious problem when the tax is first introduced. The incentive to buy all the durable goods likely to be needed for many months, or even years, will be strong to those with relatively large incomes or savings. Despite priorities and limitations on the production of such commodities there still remain ample opportunities for advance buying.
 It has been suggested that this difficulty by circumvented by requiring individuals to include in their first tax returns spendings for the six months period preceding the effective operation of the tax, and by applying the tax to two-thirds of the spendings in the eighteen month period. The objection to this method is that unless the plan is suddenly announced six months before the spendings tax is to become effective individuals cannot in practice be held for all the information required on the spendings tax form.
7. HOARDED CASH
 A weakness of the spendings tax at the beginning of its operation is that it is impossible to know the extent of hoarded cash. This figure can be falsified in the spendings tax form without fear of detection, and whether unreported cash is used by individuals to buy consumption goods or capital assets, liability under the tax diminishes by the amount of such cash. This defect cannot easily be remedied, but naturally it becomes less important with the passage of time.
THE RELATIVE MERITS OF A SPENDINGS TAX AND FURTHER INCREASES IN INCOME TAX RATES
 It is impossible, of course, to make a final judgment on the relative merits of the spendings tax and higher income tax rates without specifying what bracket rates and exemptions are contemplated for both taxes. However, certain general advantages of the spending tax can be itemized:
1. The main advantage of a tax on spendings is its power to curtail the demand for consumer goods, and consequently to reduce the threat of price inflation. In addition to collecting revenue from all taxable consumer spending, a direct brake is place on that expenditure over which the consumer has control. The spendings tax is free from two properties of the income tax which in war-time are defects: (1) the income tax restrains consumption only by siphoning off purchasing power, so that those who were able to save before rates were increased can maintain consumption by reducing saving, and (2) the income tax cannot discourage individuals from maintaining consumption by drawing upon their capital. The spendings tax places a penalty directly on all consumers who are within the scope of the tax. If rates are graduated sharply enough, the expense of consuming beyond a certain amount can become prohibitive.
2. Because the larger the income the smaller the proportion of income spent, it would, of course, be very difficult to achieve the same amount of progression under the spendings tax as under the income tax. But the spendings tax could be graduated in a variety of ways, some of which would accomplish goals outside the scope of the income tax. Three typical possibilities are the following: a. The bracket rate might be increased by five or ten percent for every $1,000 or $2,000 increase in taxable net spendings. b. Graduation might increase relatively slowly at first, rising rapidly to high rates (say, 75 percent of even 100 percent) as spendings of about $25,000 are approached. c. Graduation might increase fairly slowly to about $20,000 of spending, thereafter increasing very rapidly. For example, bracket rates of 80 percent at $20,000 might be raised to 100 percent for the twenty-first thousand, 150 percent for the twenty-second thousand, 200 percent for the twenty-third thousand, and so on. The purpose of the first type of graduation above is the composite one of bringing in large amounts of revenue, and at the same time placing a damper on expenditures in the middle income groups. The second type is designed both to raise revenue and to place a ceiling, but a fairly flexible ceiling, on personal expenditure. The third plan is intended to make spendings above $25,000 a year, even out of capital, virtually impossible. This scheme has the merit of accomplishing at least a part of the objective of the President in advocating a $25,000 limit on incomes.