[1] The luncheon was held Tuesday, August 25, 1942, at 12:30 p.m. in the Secretary's dining room. Present in addition to the Secretary were Senator George, Mr. Paul and Mr. Blough.

[2] Secretary Morgenthau said that he understood the Committee was interested in raising more revenue, and that he thought Senator George might ask the Treasury what it would recommend as a method of raising several billion dollars of additional money. He said he wanted to talk over an idea he had with the Senator to see what he thought about it. The idea was for a spendings tax, and he asked Mr. Blough to describe it briefly.

[3] Mr. Blough explained the proposal for an additional tax on consumer spendings at progressive rates above an exemption. To save administrative difficulties the tax at the bottom would be measured by income rather than spendings and would be returned to the taxpayer as a post-war credit.

[4] Senator George indicated that he thought the principle of a spendings tax had much to recommend it. He asked about the rates at which the tax would be applied and when told of a schedule which went to 30 percent and possibly of schedules going as high as 100 percent, he said that he thought members of the Committee might not want to approve the tax at rates which would increase so much the already heavy burden on the middle and larger incomes.

[5] Senator George then said that he had been thinking about a tax on gross income. Upon detailed inquiry it appeared that the tax would be a supplementary income tax, would apply to income above income tax exemptions, would be largely collected at source, might be imposed at mildly progressive rates, and would be in whole or in part returned as a post-war credit.

[6] Senator George stated that there were members of the Committee who had worked very hard for a sales tax, and that although he had not favored the sales tax he had said he would accept it if necessary to increase the revenue of the bill.

[7] In response to a question as to whether the consideration of the spendings tax would delay the passage of the bill possibly until after election, Senator George made no direct answer but said that a number of the members of the Committee who favored the Ruml plan would not be disturbed if the bill were delayed until after election. Senator George indicated that he did not favor the Ruml plan.

[8] The Secretary asked Senator George to think about the spendings tax and let him or Mr. Paul know how he felt. The Secretary said he would be glad to come up to see Senator George any time he might wish. The Senator said he would talk with Mr. Paul about it.