/1/ "the required amount of saving could be insured by issuing to all consumers licenses to purchase only to the extent of the expenditures to which they were entitled; in the case compulsory saving would become Expenditure Rationing. Alternatively consumers might be required to pay a regular schedule of penalties for spendings above their exempt minimum; in this case compulsory saving would become a type of Expenditure Taxation. Further alternative sanctions for excess spending are criminal penalties, fines adjusted to the individual circumstances, or punitive compulsory lending requirements. The use of any of these last three sanctions, however, would involve great administrative difficulties and would cause widespread public resentment." (Letter of November 10, 1942 to Mr. Byrnes, p.14).
END OF FOOTNOTE
Short of compelling specified amounts of net savings from individuals any saving incentive plan will inevitably involve some withdrawal of income. Individuals differ widely in their spending habits. Incentives that will suffice to reduce the spendings of one individual to the desired level will not suffice for another. Savings inducement plans can, however, be constructed so as to involve much withdrawal of income or relatively little. For this reason it is impossible to give any very precise indication of the amount that would have to be obtained from a savings inducement plan in order to achieve the desired reduction in consumption. At the one extreme, it might be possible to achieve a $15 billion reduction in consumption while withdrawing perhaps as little as $5 billion. At the other extreme, almost as much might be needed as under withdrawal of income plans, that is $25 billion or $30 billion.
A progressive retail sales, a spending tax, and a combination of a spendings tax with a savings tax credit are examples of plans that rely primarily on incentive effect rather than on withdrawal effect.
1. A PROGRESSIVE RETAIL SALES TAX Various plans have been suggested for a progressive retail sales tax that would allow exemptions. Most of these plans involve the use of coupons. The exemption would be granted by distributing specified minimum amounts of charge. The progressive rates would be handled by selling, at successively higher prices, books of coupons to cover purchases in exemptions.
A major difficulty with this plan is the small amount of spendings which can be brought within its scope. It is not feasible to impose a retail sales tax on domestic service, professional service, rent, and other similar items. With total spending of about $70 billion, this means that the base would be net more than about $50 billion before exemptions. Exemptions reduce the base still farther. For example, suppose only $300 of free coupons were issued to cover expenditures of each adult and $150 for each child. This would involve the issuance of free coupons covering in the aggregate from 4217 billion to $30 billion of expenditures.
True, some of these coupons would go to persons whose expenditures were less than the exemptions. It would seem an almost insuperable administrative task to prevent the transfer by sale of these free coupons to persons whose spendings were larger than the exempt amount. Such transfers would be in the mutual interest of persons with larger spendings and of persons with smaller spendings. consequently, practically the whole of the free coupons should be deducted from what would otherwise be the base of the tax, leaving only $233 billion in the base.
With a base so small, there is little room for progression. Suppose the first rate bracket is made $300 for each adult and $150 for each child, or the same as the exemptions. This would involve first bracket coupons covering aggregate spendings of $27 billion or$30 billion -- more than the entire base. As with the exemption coupons, it would be to the mutual advantage of both parties for persons in the higher brackets to pay persons with spendings less than the first bracket to buy low bracket coupons for them. In the light of the administrative difficulties with a progressive retail sales tax, about the most that would be feasible would be a flat rate tax above exemptions.
With a base of $20 billion to $23 billion and a necessary reduction in consumption of $15 billion, a flat rate of 70 percent to $80 percent would be needed if each dollar of tax reduced spending by a dollar. Conceivably, a lower rate might do in view of the savings incentive effect of such high rates.
2. A SPENDINGS TAX
The spendings tax is a much more feasible incentive plan than a progressive rate retail sales tax. A spendings tax would be based on the total amount that an individual spends in any specified period. The amount he spends would be computed indirectly by computing the total funds at his disposal and subtracting all funds used for purposes other than current consumption -- for payment of insurance premiums, repayment of debt, purchase of war bonds or other assets.
Under the spendings tax it would be feasible to include all types of expenditures, service as well as commodities. The problem of trafficking in extra coupons would be entirely avoided. An individual who spends less than the spendings exemption would have nothing to transfer to other individuals. He would merely be subject to no tax. Consequently, the base of the spendings tax can be very much larger than the base of a progressive retail sales tax.
The amount of revenue that will have to be raised by a spendings tax designed to reduce spending by $15 billion depends on the extent to which the spendings tax will be paid out of money that would otherwise have been spent, or cut of money that would otherwise have been saved. Even though the spendings tax imposes a direct penalty on spendings, perhaps the most that can reasonably be expected is that a dollar of spendings tax will cut spendings by a dollar, i.e., the none of the spendings tax would be paid out of money that would otherwise have been saved. With an extremely progressive spendings tax employing high marginal rates, it is conceivable that spendings would be reduced by even more than the tax. With a relatively flat low rate spendings tax, spendings would be reduced by less than the tax. If we accept the tentative assumption that a dollar of tax will reduce spendings by a dollar, a spendings tax would have to be designed to raise approximately $15 billion from total spendings of about $70 billion.
Exemptions should be allowed under the spendings tax to protect minimum standards of living. If the exemptions were $400 for a single person, $800 for a married couple, and an additional $200 for each dependent, the total amount of spending covered by the exemptions would be in the neighborhood of $35 billion, or half of aggregate spendings. This would leave as the base of the spendings tax $35 billion, implying an effective rate of 43 percent on spendings above exemptions.
In view of the concentration of spendings in the lower brackets, such an effective rate could be achieved only by a schedule with relatively narrow brackets at the bottom, a relatively high initial rate, and step progression.
The following table shows for a married couple with no dependents the schedule that would be needed to reduce consumptions by the whole of the treasury $15 billion.
Spendings tax schedule required to reduce consumption by $15 billion (Married couple, no dependents ______________________________________________________ Spendings Bracket Cumulative brackets /1/ rates tax 0 - $ 800 0 0 800 - 1,000 20% $ 40 1,000 - 1,200 40 120 1,200 - 1,600 60 360 1,600 - 2,000 100 760 2,000 - 2,400 150 1,360 2,400 - 3,000 200 2,560 3,000 - 4,000 250 5,060 4,000 - 6,000 300 11,060 6,000 - 10,000 350 25,060 10,00 and over 400 - ______________________________________________________
FOOTNOTE TO TABLE
/1/ For single persons, brackets will be half of those shown; for families with dependents, brackets will be wider than those shown.
END OF FOOTNOTE TO TABLE
Final liability under the spendings tax would not be determined until after the close of the year. It would be computed at the same time as the regular income tax and on the same form. The spendings tax would, however, be of little immediate value as an anti-inflation instrument if actual collection of the tax were delayed this long. Consequently, a substantial part of the tax should be collected currently during the year by (1) collection at source from income received in the form of wages and salaries, interest and dividends and (2) quarterly returns for persons with income from other sources and for persons in the higher spendings tax brackets.
3. SPENDINGS TAX COMBINED WITH SAVINGS CREDIT
Under the spendings tax alone an individual who reduces his consumption by the socially desired amount does not necessarily escape the tax. The spendings tax can be escaped entirely only by reducing spendings to the level of exemptions. But this involves a more drastic equalization of spending than is either necessary or desirable. Even the most progressive schedule of desired reductions in spending shown in Table 2, schedule C-1 permitted considerable inequality in spending. Under this schedule, spendings varies from an average of $616 for persons with income below $1,000 to an average of $4,000 for persons with incomes above $10,000.
Under a plan that is designed primarily to induce savings it seems reasonable than an individual who reduces his spendings to the degree desired, should escape all or most of the tax. This objective could be accomplished directly by a spendings tax with variable exemptions, the exemptions being higher the higher the income.
The same objective can be accomplished indirectly by combining the spendings tax with a credit for savings. For example, a flat 50 percent levy on spendings might be combined with a credit against the levy equal to 25 percent of the amount of savings. With these rates if an individual spent on consumption goods 1/3 of his income, the net spendings tax would be zero. The tax on his spending would be 50 percent of 33-1/3 percent, or 1/6 of his income. The credit for savings would be 25 percent of 66-2/3 percent, or also 1/6 of his income. This is equivalent to a spendings tax on 75 percent on spendings in excess of an exemption of 1/3 of income.
The plan would be more acceptable if the percentage of income exempt declined as income rose, that is, if the spendings to be permitted without the payment of the tax were a smaller percentage of a larger income than of a small income. This objective can be accomplished by using a graduated spendings tax instead of a flat rate spending tax while keeping a flat rate credit for saving.
With a 25 percent credit for saving, the following spendings tax schedule is a rough guess of a schedule that would be sufficient to accomplish the desired reduction in consumption.
Spending tax schedule to reduce consumption by $15 billion, if combined with a 25 percent savings credit /1/ Married couple -- no dependents _____________________________________________________________ Spendings brackets /2/ Bracket rate Cumulative Tax (percent) _____________________________________________________________ 0 - 800 0 0 800 - 1,000 25 50 1,000 - 1,200 40 130 1,200 - 1,400 50 230 1,400 - 1,600 60 350 1,600 - 1,800 70 490 1,800 - 2,000 80 650 2,000 - 2,400 100 1,050 2,400 - 3,000 120 1,770 3,000 - 4,000 150 3,270 4,000 - 5,000 200 5,270 5,000 - 7,000 300 11,270 7,000 - 10,000 400 23,270 10,000 and over 600 -- _____________________________________________________________
FOOTNOTES TO TABLE
/1/ Savings is the amount by which net income exceeds the sum of spendings, the income tax and the Victory tax.
/2/ For single persons, brackets would be half the size of those shown; for families with dependents, brackets would be wider than those shown.
END OF FOOTNOTES TO TABLE
The spendings that could be made at various income levels without the payment of tax under this particular schedule are as follows:
Spendings that could be made without payment of tax, under Plan A for selected net incomes (Married couple, no dependents) Net income after Spendings Associated income and possible savings Victory tax without tax $ 800 $ 800 $ 0 900 850 50 1,000 900 100 1,200 1,000 200 1,400 1,077 323 1,600 1,154 446 1,800 1,227 573 2,000 1,293 707 2,500 1,453 1,047 3,000 1,600 1,400 4,000 1,857 2,143 5,000 2,080 2,920 6,000 2,280 3,720 8,000 2,641 5,359 10,000 2,986 7,014 12,000 3,274 8,726 15,000 3,703 11,297 20,000 4,324 15,676 30,000 5,302 24,698 50,000 6,840 43,160 100,000 9,819 90,181 250,000 15,877 234,123
This type of plan permits a very strong savings inducement with relatively small withdrawal of income. For every dollar that an individual reduces his consumption, he gains in two way. First, he saves the spendings tax on that dollar and second, he gets a credit of an additional 25 cents for the extra dollar of savings. Consequently, with an initial spendings tax rate of 25 percent, the marginal effect is at a 50 percent rate since an additional dollar of savings will save 25 cents in tax and add 25 cents to the savings credit.
Another modification of the plan that might be desirable would be to give a credit only for savings in excess of some minimum standard, since there seems little reason to give a credit for savings that would be made in any event. In line with the war bond saving campaign the minimum standard might be made 10 percent of net income in excess of exemptions. The savings credit might then be made 25 percent of savings in excess of this minimum standard. With this modification and with the same schedule as before, the spendings that could be made without the payment of tax would be lower since the credit against the spendings tax would be less. Consequently, a somewhat lower schedule would have the same consumption reducing effect. The amount of spending that could be made without the payment of the tax would, however, be lower than under the first plan. With a 25 percent savings credit of this type, a tentative schedule to accomplish the desired reduction in consumption, as the spendings that could be made without the payment of tax, follows:
Schedule for savings over 10 percent Plan B -- Spendings tax schedule to reduce consumption by $15 billion, if worked with a 25 percent credit for savings /1/ in excess of minimum savings (10 percent of net income after income and Victory taxes and other exemptions) Married couple -- no dependents Spendings brackets /2/ Bracket rate Cumulative Tax (percent) $ 0 - $ 800 0 0 800 - 1,000 20 40 1,000 - 1,200 30 100 1,200 - 1,400 40 180 1,400 - 1,600 50 280 1,600 - 1,800 60 400 1,800 - 2,000 70 540 2,000 - 2,400 80 860 2,400 - 3,000 100 1,460 3,000 - 4,000 140 2,860 4,000 - 6,000 200 6,860 6,000 - 7,000 300 12,860 7,000 - 10,000 400 20,860 10,000 and over 550 --
FOOTNOTE TO TABLE
/1/ Savings are equal to the excess of net income over the sum of spendings, the income tax, and the Victory tax.
/2/ For single persons, brackets would be half the size of those shown; for families with dependents, the brackets would be wider than those shown.
END OF FOOTNOTES TO TABLE
Spendings that could be made without payment of tax under Plan B, for selected income levels Married couple -- no dependents _____________________________________________________________________ Net income Spendings Associated Associated after income possible savings excess over and Victory without minimum tax tax savings _____________________________________________________________________ $ 800 $ 800 $ 0 $ 0 900 845 55 45 1,000 890 110 90 1,200 980 220 180 1,400 1,064 336 276 1,600 1,145 455 375 1,800 1,220 580 480 2,000 1,280 720 600 2,500 1,430 1,070 900 3,000 1,580 1,420 1,200 4,000 1,821 2,179 1,859 5,000 2,044 2,956 2,536 6,000 2,224 3,776 3,256 8,000 2,584 5,416 4,696 10,000 2,944 7,056 6,136 12,000 3,217 8,783 7,663 15,000 3,603 11,397 9,977 20,000 4,191 15,809 13,889 30,000 5,132 24,868 21,948 50,000 6,517 43,483 38,563 100,000 9,278 90,722 80,802 250,000 14,191 235,809 210,889
It should be noted that under a plan
combining a spendings tax