Date 3 September 1942
Author Randolph E. Paul, General Counsel, Treasury Department
Title Statement Before the Senate Finance Committee
Description Congressional Testimony
Location Box 6; Papers of Roy Blough; Harry S. Truman Presidential Library, Independence, MO.
 
STATEMENT OF RANDOLPH E. PAUL, GENERAL COUNSEL OF THE TREASURY DEPARTMENT, BEFORE THE SENATE FINANCE COMMITTEE IN EXECUTIVE SESSION IN SUPPORT OF THE RECOMMENDATIONS OF THE SECRETARY OF THE TREASURY FOR AN ADDITIONAL WAR-TIME REVENUE PROGRAM

[1] In his statement Secretary Morgenthau emphasized the need for additional taxes to increase Treasury receipts out of current income by an amount far in excess of his previous recommendations and to exercise a strong restraining influence on consumer spending in order to furnish an effective weapon for combatting inflationary increases in prices.

[2] The Secretary has indicated the broad outlines of the Treasury's recommendations. It is my purpose to discuss these recommendations in detail. The proposed spendings tax is in two parts -- a flat rate tax to be refunded after the war, and a progressive surtax.

THE REFUNDABLE PART OF THE SPENDINGS TAX

[3] The refundable part of the spendings tax would be imposed at a flat rate of 10 percent on the total spendings of individuals for consumer goods and services. In general, it would apply to all individuals who had income subject to the individual income tax, and also to individuals subject to the spendings surtax whether or not they had income subject to the income tax.

[4] It is suggested that single persons be entirely outside the scope of the tax only if their income is less than $500, and married couples only if their income is less than $1,000. The exclusion would be increased by an additional $250 for each dependent. The test for determining liability to file a refundable spendings tax return would therefore be stated in terms of income, even though the tax itself would be assessed on the basis of spendings. The reason for using the income test is to facilitate the administration of the refundable spendings tax by collecting it in conjunction with the individual income tax.

TAX BASE

[5] The tax would be levied on total spendings of persons filing returns and reporting total spendings in excess of $500 for a single person, $1,000 for a married couple, and an additional $250 for each dependent. The tax would be imposed on the taxpayer's total spendings, not merely on that part of his spendings above these amounts.

[6] The amount of spendings would be computed indirectly. From the total amount of funds at the disposal of the taxpayer, derived either from current income or by drawing on capital, there would be subtracted the amount of savings. "Savings" would be defined to include, chiefly, repayment of debt, premiums paid on life insurance, expenditures for the purchase of bonds or other capital assets, gifts and contributions, payment of taxes and increases in bank balances. The items needed to determine the tax base are shown in the attached schedule (Exhibit 1).

METHOD OF COLLECTION

[7] The refundable part of the spendings tax would be collected in the same manner and at the same time as the individual income tax. A tentative tax would be collected at source on wages, salaries, and dividends in the same manner as it is proposed to collect part of the regular income tax. A spendings tax return would be made part of the annual income tax return. The amount of spendings and the tax thereon would also be computed on the same return. The total of the income tax and the spendings tax payable would be ascertained by deducting the income tax and the spendings tax already collected at source. If the amount collected at source exceeded the combined tax liability, the excess would be promptly repaid to the taxpayer.

SHORT INCOME AND SPENDINGS TAX FORM

[8] The great majority of taxpayers would be eligible to file a simplified refundable spendings tax return which would be a supplementary part of their simplified income tax return.

TAX RATE AND AMOUNT OF TAX

[9] The refundable part of the spendings tax could be levied at a rate of 10 percent on the taxpayer's total spendings. An individual with an income of $5,000, for example, who spent $3,200, would pay a tax of $320. If he increased his savings and spent only $2,400, the tax liability would be reduced to $240.

[10] Special provision would be required to avoid large differences between the tax on persons just below and just above the exclusion limits -- that is, the limits at which the tax becomes applicable. For a single person without dependents, for instance, the exclusion amount is $500. Those with spendings in excess of $500 would be liable to a tax of 10 percent on all their spendings. In some cases, in the absence of a special provision, the tax would be greater than the excess of their spendings over the exclusion limits. An individual spending $510, for example, would be subject to a tax of $51, whereas if he spent only $500, he would not be subject to tax. To provide for a gradual transition between non-taxable and taxable individuals, it is proposed that the tax on persons just above the exclusion limits shall not exceed the excess of their spendings over the exclusion limits. In the illustration cited, the tax on the single individual spending $510 would be $10.

REFUNDING OF SPENDINGS TAX

[11] It is suggested that this flat-rate spendings tax be made refundable without interest after the war. The amount collected in the first year of operation of the tax might be refunded in the first year following the close of the war; the amount collected in the second year might be refunded in the second year following the close of the war; and so on. It might also be desirable to provide for earlier refunding after the close of the war at the discretion of the Secretary of the Treasury. Provision should in any event be made for the earlier refunding of the tax even prior to the close of the war in cases of proven distress.

[12] The Treasury proposes that the entire amount of the flat- rate tax be refunded. However, if the Committee should desire to do so, it is technically feasible to refund the entire tax only to the lower income groups.

THE INDIVIDUAL SPENDINGS SURTAX

[13] I turn now to a discussion of the second part of the spendings tax, the spendings surtax. This tax would be imposed at progressive rates on expenditures in excess of an exemption of $1,000 for a single person, $2,000 for a married couple, and an additional $500 for each dependent. In contrast to the exclusions under the flat rate tax, these exemptions provide a minimum of spendings that is free from surtax for everyone, regardless of the total amount spent.

[14] The spendings would be calculated in the same manner as in the case of the refundable spendings tax -- that is, they would not include such items as debt repayment, insurance premiums and bond purchases -- except that you may want to consider allowing some extraordinary expenditures also to be deducted.

METHOD OF COLLECTION

[15] The tax would be collected currently by requiring individuals to report the approximate amount of spending at short intervals, say quarterly, with a final adjustment after the close of the year. The quarterly report might contain no more than a single item -- the approximate amount of spending during the preceding quarter.

TAX RATES

[16] The tax rates would be progressive. The following surtax rate schedule is suggested:


            Spendings        :      Tax rate
            (Brackets)       :     (Brackets)
         _______________           __________
         $    0 - $1,000               10%
          1,000 -  2,000               20
          2,000 -  3,000               30
          3,000 -  5,000               40
          5,000 - 10,000               50
          Over $10,000                 75

[17] This schedule would apply to a single person in the usual manner. However, direct application of this progressive spendings tax schedule to a family as a unit would be unduly harsh on large families and would favor single persons. This follows from the fact that the larger the family, the greater is the necessary amount of spendings and the higher the rate at which the spendings would be taxed. This difficulty can be overcome by putting the family's tax on a per capita basis. The family's total spendings would be divided by the number of persons in the family. The progressive rate schedule would then be applied to the resulting per capital spendings. The per capita tax computed in this way would be multiplied by the number of persons in the family to get the total family tax. For this purpose, a dependent child would be counted as equivalent to one-half a person.

[18] For example, a married couple with one dependent would comprise 2.5 taxable persons. If this family spent $5,000, spendings in excess of the exemption of $2,500 would be $2,500 or $1,000 per taxable person. According to the above rate schedule, the surtax would be $100 per person, or $250 for the family (2.5 times $100). Married couples would be permitted to file either joint returns or separate returns, since discrimination would be avoided by the method of computing spendings per taxable person. The amounts and effective rates of tax under the above rate schedules are shown in Exhibits 2, 2a, 2b and 2c.

EFFECTIVE DATE OF SURTAX

[19] The spendings surtax should be made effective as of September 1, 1942. It is essential that this be done in order to prevent large scale buying and hoarding of consumers' goods in anticipation of the enactment of the spendings tax. In addition, unless the spendings tax is made effective as of the date on which it is announced, individuals would be given an opportunity to convert their bank deposits into currency, hoping thereby to set aside spendable funds upon which an adequate check could not be made. These and similar dangers can be prevented only by making the spendings surtax effective as of September 1, 1942. The corresponding difficulties are not of great importance with respect to the refundable part of the spendings tax and this could go into effect January 1, 1943.

REDUCTION OF EXEMPTIONS FOR THE REGULAR INCOME TAX

[20] In addition to the spendings tax, the Treasury recommends a reduction in the personal exemptions under the individual income tax.

[21] The exclusions of $500, $1,000, and $250 for the refundable spendings tax are believed to be desirable in order that a very large volume of consumer spendings may be brought into the tax base. For purposes of simplicity the income tax exemptions and the refundable spendings tax exclusions should be the same amounts of income. Accordingly, it is suggested that the personal income tax exemptions be lowered to $500 for single persons, $1,000 for married couples, and $250 for each dependent. This step will need to be taken in any event as the impact of the war increases. It represents a $200 reduction in a married couple's exemption and a $50 reduction in the amount of the dependent credit, from the exemptions tentatively adopted by your Committee.

[22] The proposal would increase the number of taxpayers to some five million above the estimated number under the exemptions tentatively adopted by the Committee. Under the rates of H.R. 7378, the lowering of exemptions would increase the tax liability of a married person without dependents having an income of $2,000 from $140 to $178; for one with an income of $10,000 from $2,152 to $2,200. A married person with two dependents having an income of $2,000 would pay a tax of $83, whereas with the exemptions under H.R. 7378, he would pay no tax. For a $10,000 income, the tax liability would be increased from $1,880 to $2,050. The amounts of tax and the effective rates for taxpayers with selected net incomes under present law, under the rates H.R. 7378, with the proposed lowered exemptions, are shown in Tables 3, 3a, 3b, and 3c.

[23] The proposed reductions in personal exemptions and credit for dependents will increase substantially the tax load of those in the lowest taxable income groups and you may want to consider revising the surtax rate schedule to reduce the impact on these groups. We should be glad to submit such schedules for your consideration.

EFFECT OF THE TREASURY PROGRAM

[24] The total yield of the proposed program at 1942 levels of income is estimated to be $6.5 billion. Of this amount, $4.5 billion would be refundable to taxpayers after the war.

[25] Examples illustrating the combined effects of the refundable part of the spendings tax, the spendings surtax and the reduced individual income tax exemptions for individuals with selected amounts of income are shown in Exhibits 4 through 4d. For example, a married couple with two dependents having an income of $5,000 would have an income tax liability of $680. If their spendings amount to $3,800 the spendings surtax would be $80 and the refundable spendings tax, $380. If their spendings were only $3,100 the spendings surtax would be reduced to $10 and the refundable spendings tax to $310. Their combined tax would be $1,140 in the first case and $1,000 in the second case. Of these amounts, however, $380 or $310, respectively, would be refunded after the war.

EFFECT OF THE TREASURY PROPOSALS ON THE ANTI-INFLATION PROGRAM

[26] The spendings tax will raise very substantial amounts of revenue and will accordingly be valuable in financing the war. More important, it will be particularly helpful as an anti-inflation measure in two ways: (1) by withdrawing consumer purchasing power and thus reducing the demand for goods, and (2) by creating an obstacle to spending, thus checking spending and encouraging saving. Because it will apply only to individual spendings and not to business spendings, it will greatly facilitate the exercise of direct price controls, rationing, and other methods of combating inflation.

[27] The refundable part of the spendings tax and the spendings surtax differ in the emphasis placed on these two methods of reducing spending. The refundable tax, applying to the bulk of total individual spending at a 10 percent rate, will be effective primarily by withdrawing purchasing power. The spendings surtax, on the other hand, is intended primarily to discourage spending directly, rather than to absorb large amounts of purchasing power. For this reason it is imposed only on spending above a fairly adequate living level, but at increasingly heavy rates. Insofar as spendings are not checked, the tax will bring substantial payments into the Treasury; insofar as they are checked, inflationary pressure on the price level will be reduced.

[28] For these reasons, these taxes should provide a powerful instrument for combating inflation. Moreover, they provide an adjustable instrument which, once put in operation, can be increased or decreased as the current economic situation requires.

[29] Like any new tax, and perhaps more than some taxes, a spendings tax necessarily involves administrative and compliance problems. These problems are reduced by the fact that a spendings tax can be administered in conjunction with the individual income tax. As a consequence, the refundable tax will require no additional returns, and the collection of the refundable tax at source will impose no additional burden on either withholding agents or the Bureau of Internal Revenue. Nevertheless, the spendings tax will create an administrative problem in checking on information not now required on income tax returns, in familiarizing the public with a new type of tax, and in helping the public to fill out the forms that they will be required to submit. Compared with other measures of like importance in meeting the inflation and revenue problems, the administrative difficulties should not prove disproportionately large. In time of war, administrative difficulties cannot be allowed to stand in the way of measures vital to the Nation's welfare.


EXHIBIT 1

THE INDIVIDUAL SPENDINGS TAX SCHEDULE

(To be used by persons subject to the spendings surtax and by
persons not eligible to use simplified income tax return. A
simplified spendings tax schedule will be available to all other
persons subject to the spendings tax.)

Funds at the disposal of the individual

1. Salaries, wages, and other compensation for personal services $

2. Dividends and interest received, including government interest

3. Rents, royalties, annuities, pensions

4. Withdrawals from business, professions, partnerships, trusts

5. Cash receipts from gifts, bequests, and insurance

6. Receipts from sale of capital assets

7. Receipts from repayment of loans made to others

8. Receipts from borrowing, including debts incurred on
installment purchases

9. Cash and bank balances at beginning of year

10. Other receipts

11. Total disposable funds (items 1 to 10) $


Deductions: Non-taxable use of funds

12. Cash and bank balances at end of year $

13. Cash gifts and contributions

14. Interest and taxes paid, except on owner-occupied homes

15. Expenditures on the purchase of capital assets

16. Life insurance premiums, annuity, and pension payment

17. Outlays for repayment of debt, including installment debt

18. Loans made to others

19. Other nontaxable disbursements ______

20. Total deductions (items 12 to 19) $

21. Expenditures subject to tax (item 11 minus item 20)

EXHIBIT 2. INDIVIDUAL SPENDINGS SURTAX: RATES AND AMOUNT OF SURTAX 
 
Expenditure                                  Cumulative surtax    
per taxable               Surtax rate        per taxable person   
  person                  (Bracket)            at upper limit       
(Bracket)                                        of bracket           
_______________           ____________       __________________
                                                                
$   0 - $1,000                10%                  $  100           
1,000 -  2,000                20                      300        
2,000 -  3,000                30                      600        
3,000 -  5,000                40                    1,400        
5,000 - 10,000                50                    3,900        
Over 10,000                   75                      --         
_______________________________________________________________

                             EXHIBIT 2A
           REFUNDABLE SPENDINGS TAX AND SPENDINGS SURTAX:
           AMOUNT OF TAX AND TAX AS PER CENT OF SPENDINGS

                    Single person - No dependents

           Exclusion for refundable tax             -$  500
           Exemption for surtax                     - 1,000

_____________________________________________________________________
 Total             Amount of tax
spendings  ______________________________   Surtax as   Total tax          
before     Refundable    Surtax     Total   percent of  as percent of      
exemption     tax                    tax    spendings   spendings          
_________  ____________  ______     _____   __________  _____________ 
                                                                         
   500         [$0        [$0        [$0      0%            0%             
   800          80          0         80      0            10.0            
 1,000         100          0        100      0            10.0            
 1,200         120         20        140      1.7          11.7            
 1,500         150         50        200      3.3          13.3            
 2,000         200        100        300      5.0          15.0            
 2,500         250        200        450      8.0          18.0            
 3,000         300        300        600     10.0          20.0            
 3,500         350        450        800     12.9          22.9            
 4,000         400        600      1,000     15.0          25.0            
 5,000         500      1,000      1,500     20.0          30.0            
 6,000         600      1,400      2,000     23.3          33.3            
 8,000         800      2,400      3,200     30.0          40.0            
10,000       1,000      3,400      4,400     34.0          44.0            
15,000       1,500      6,900      8,400     46.0          56.0            
20,000       2,000     10,650     12,650     53.3          63.3            
25,000       2,500     14,400     16,900     57.6          67.6            
50,000       5,000     33,150     38,150     66.3          76.3            
_____________________________________________________________________

                             EXHIBIT 2B
           REFUNDABLE SPENDINGS TAX AND SPENDINGS SURTAX:
           AMOUNT OF TAX AND TAX AS PER CENT OF SPENDINGS

                   Married person - No dependents

                Exclusion for refundable tax - $1,000
                 Exemption for surtax        -  2,000

_____________________________________________________________________
 Total             Amount of tax                                      
spendings  ______________________________   Surtax as   Total tax     
before      Refundable   Surtax     Total   percent of  as percent of 
exemption      tax                   tax    spendings   spendings     
_________  ____________  ______     _____   __________  _____________ 

[$1,000        [$0          [$0        [$0       0%           0%    
 1,500         150            0        150       0           10.0     
 2,000         200            0        200       0           10.0     
 2,500         250           50        300       2.0         12.0     
 3,000         300          100        400       3.3         13.3     
 3,500         350          150        500       4.3         14.3     
 4,000         400          200        600       5.0         15.0     
 5,000         500          400        900       8.0         18.0     
 6,000         600          600      1,200      10.0         20.0     
 8,000         800        1,200      2,000      15.0         25.0     
10,000       1,000        2,000      3,000      20.0         30.0     
15,000       1,500        4,300      5,800      28.7         38.7     
20,000       2,000        6,800      8,800      34.0         44.0     
25,000       2,500       10,050     12,550      40.2         50.2     
50,000       5,000       28,800     33,800      57.6         67.6     
____________________________________________________________________

                             EXHIBIT 2C
       REFUNDABLE SPENDINGS TAX AND SPENDINGS SURTAX:  
       AMOUNT OF TAX AND TAX AS PERCENT OF SPENDINGS

                   Married person - Two dependents

             Exclusion for refundable tax      - $1,500
             Exemption for surtax              -  3,000

_____________________________________________________________________
 Total             Amount of tax                                      
spendings  ______________________________   Surtax as   Total tax     
before     Refundable    Surtax     Total   percent of  as percent of 
exemption    tax                     tax    spendings   spendings     
_________  ____________  ______     _____   __________  _____________ 

$1,500      $     0          0        [$0         0%         0%     
 2,000          200          0        200         0         10.0     
 2,500          250          0        250         0         10.0     
 3,000          300          0        300         0         10.0     
 3,500          350         50        400       1.4         11.4     
 4,000          400        100        500       2.5         12.5     
 5,000          500        200        700       4.0         14.0     
 6,000          600        300        900       5.0         15.0     
 8,000          800        700      1,500       8.8         18.8     
10,000        1,000      1,200      2,200      12.0         22.0     
15,000        1,500      3,000      4,500      20.0         30.0     
20,000        2,000      5,200      7,200      26.0         36.0     
25,000        2,500      7,700     10,200      30.8         40.8    
50,000        5,000     24,450     29,450      48.9         58.9    
_____________________________________________________________________

                              EXHIBIT 3
         COMPARISON OF INDIVIDUAL SURTAX RATE SCHEDULE UNDER
                      PRESENT LAW AND H.R. 7378
___________________________________________________________________
                     Bracket rate          Total surtax cumulative
Surtax net       _____________________     ________________________
  income         Present                    Present
  (000)            law       H.R. 7378        law         H.R. 7378
___________________________________________________________________


       -     2      6           13            120             260        
   $2  -     4      9           16            300             580        
    4  -     6     13           20            560             980        
    6  -     8     17           24            900           1,460        
    8  -    10     21           28          1,320           2,020        
   10  -    12     25           32          1,820           2,660        
   12  -    14     29           36          2,400           3,380        
   14  -    16     32           40          3,040           4,180        
   16  -    18     35           43          3,740           5,040        
   18  -    20     38           46          4,500           5,960        
   20  -    22     41           49          5,320           6,940        
   22  -    26     44           52          7,080           9,020        
   26  -    32     47           55          9,900          12,320        
   32  -    38     50           58         12,900          15,800        
   38  -    44     53           61         16,080          19,460        
   44  -    50     55           63         19,380          23,240        
   50  -    60     57           66         25,080          29,840        
   60  -    70     59           69         30,980          36,740        
   70  -    80     61           72         37,080          43,940        
   80  -    90     63           75         43,380          51,440        
   90  -   100     64           77         49,780          59,140        
  100  -   150     65           79         82,280          98,640        
  150  -   200     66           81        115,280         139,140        
  200  -   250     67           82        148,780         180,140        
  250  -   300     69           82        183,280         221,140        
  300  -   400     71           82        254,280         303,140        
  400  -   500     72           82        326,280         385,140         
  500  -   750     73           82        508,780         590,140        
  750  - 1,000     74           82        693,780         795,140        
1,000  - 2,000     75           82      1,443,780       1,615,140        
2,000  - 5,000     76           82      3,723,780       4,075,140        
5,000 and over     77           82           --             --           
___________________________________________________________________

           EXHIBIT 3A. AMOUNT OF INDIVIDUAL INCOME TAX AND
            EFFECTIVE RATES UNDER PRESENT LAW, H.R. 7378,
               AND H.R. 7378 WITH LOWERED EXEMPTIONS.

                   Single person -- No dependents

            Personal exemption: Present law        - $750
                                H.R. 7378          -  500
                                Treasury proposal  -  500
_____________________________________________________________________ 
                     Amount of tax             Effective rates
               _____________________________________________________
Net income                     H.R. 7378                   H.R. 7378
before                           with                        with
personal     Present    H.R.    lowered    Present   H.R.   lowered
exemption /1/  law      7378   exemptions    law     7378  exemptions
_____________________________________________________________________ 
  
                                           Percent Percent Percent
                                           _______ _______ _______

$     500        $--       $--       $--       --      --      --
      600         --        15        15       --     2.5     2.5
      700         --        34        34       --     4.9     4.9
      800          3        52        52       .4     6.5     6.5
      900         11        71        71      1.2     7.8     7.8
    1,000         21        89        89      2.1     8.9     8.9
    1,200         40       126       126      3.3    10.5    10.5
    1,500         69       181       181      4.6    12.1    12.1
    2,000        117       273       273      5.9    13.7    13.7
    2,500        165       365       365      6.6    14.6    14.6
    3,000        221       472       472      7.4    15.7    15.7
    4,000        347       686       686      8.7    17.2    17.2
    5,000        483       920       920      9.7    18.4    18.4
    6,000        649     1,174     1,174     10.8    19.6    19.6
    8,000      1,031     1,742     1,742     12.9    21.8    21.8
   10,000      1,493     2,390     2,390     14.9    23.9    23.9
   15,000      2,994     4,366     4,366     20.0    29.1    29.1
   20,000      4,929     6,816     6,816     24.6    34.1    34.1
   25,000      7,224     9,626     9,626     28.9    38.5    38.5
   50,000     20,882    25,811    25,811     41.8    51.6    51.6
  100,000     53,214    64,641    64,641     53.2    64.6    64.6
  500,000    345,654   414,616   414,616     69.1    82.9    82.9
1,000,000    733,139   854,616   854,616     73.3    85.5    85.5
5,000,000  3,923,124 4,374,616 4,374,616     78.5    87.5    87.5
_____________________________________________________________________ 
Normal tax 
 rate (percent)  4        6        6          4       6       6

                          FOOTNOTE TO TABLE

     /1/ Maximum earned income assumed.

                      END OF FOOTNOTE TO TABLE

                             EXHIBIT 3B 
            AMOUNT OF INDIVIDUAL INCOME TAX AND EFFECTIVE
               RATES UNDER PRESENT LAW, H.R. 7378, AND
                  H.R. 7378 WITH LOWERED EXEMPTIONS

                   Single person -- No dependents

            Personal exemption: Present law        - $1,500
                                H.R. 7378          -  1,200
                                Treasury proposal  -  1,000
_____________________________________________________________________ 
                     Amount of tax             Effective rates
               _____________________________________________________
Net income                     H.R. 7378                   H.R. 7378
before                           with                        with
personal     Present    H.R.    lowered    Present   H.R.   lowered
exemption /1/  law      7378   exemptions    law     7378  exemptions
_____________________________________________________________________ 
  
                                           Percent Percent Percent
                                           _______ _______ _______
   $1,000        $--       $--       $--       --      --      --
    1,100         --        --        13       --      --     1.2
    1,200         --        --        31       --      --     2.6
    1,300         --        13        49       --     1.0     3.8
    1,400         --        30        68       --     2.1     4.9
    1,500         --        48        86       --     3.2     5.7
    1,600          6        66       104      0.4     4.1     6.5
    1,800         23       103       141      1.3     5.7     7.8
    2,000         42       140       178      2.1     7.0     8.9
    2,500         90       232       270      3.6     9.3    10.8
    3,000        138       324       362      4.6    10.8    12.1
    4,000        249       532       576      6.2    13.3    14.4
    5,000        375       746       790      7.5    14.9    15.8
    6,000        521       992     1,044      8.7    16.5    17.4
    8,000        873     1,532     1,592     10.9    19.2    19.9
   10,000      1,305     2,152     2,220     13.1    21.5    22.2
   15,000      2,739     4,052     4,136     18.3    27.0    27.6
   20,000      4,614     6,452     6,556     23.1    32.3    32.8
   25,000      6,864     9,220     9,336     27.5    36.9    37.3
   50,000     20,439    25,328    25,466     40.9    50.7    50.9
  100,000     52,704    64,060    64,226     52.7    64.1    64.2
  500,000    345,084   414,000   414,176     69.0    82.8    82.8
1,000,000    732,554   854,000   854,176     73.3    85.4    85.4
5,000,000  3,922,524 4,374,000 4,374,176     78.5    87.5    87.5
_____________________________________________________________________ 
Normal tax 
 rate (percent)  4        6        6          4       6       6

                          FOOTNOTE TO TABLE

     /1/ Maximum earned income assumed.

                      END OF FOOTNOTE TO TABLE

   EXHIBIT 3C. AMOUNT OF INDIVIDUAL INCOME TAX AND EFFECTIVE RATES 
 UNDER PRESENT LAW, H.R. 7378, AND H.R. 7378 WITH LOWERED EXEMPTIONS

                  Married person -- two dependents

     Personal exemption: Present law         -- $1,500
                         H.R. 7378           --  1,200
                         Treasury proposal   --  1,000

     Dependent credit:   Present law         --   $400
                         H.R. 7378           --    400
                         Treasury proposal   --    250
_____________________________________________________________________ 
                         Amount of Tax              Effective rate
             ________________________________________________________ 
Net income                     H.R. 7378                  H.R. 7378
before                           with                       with
personal        Present   H.R.  lowered    Present  H.R.   lowered
exemption /1/     law     7378 exemptions    law    7378  exemptions
_____________________________________________________________________ 
                                           Percent Percent  Percent
                                           _______ _______  _______
   $1,500         --        --        --      --      --       --
    1,600         --        --       $13      --      --      0.8
    1,700         --        --        28      --      --      1.6 
    1,800         --        --        46      --      --      2.6   
    1,900         --        --        65      --      --      3.4
    2,000         --        --        83      --      --      4.2
    2,100         --       $13       101      --     0.6      4.8       
    2,200         --        26       120      --     1.2      5.5 
    2,300         --        43       138      --     1.9      6.0
    2,400         $6        62       157     0.3     2.6      6.5
    2,500         12        80       175     0.5     3.2      7.0
    3,000         58       172       267     1.9     5.7      8.9
    4,000        154       356       466     3.9     8.9     11.7
    5,000        271       570       680     5.4    11.4     13.6
    6,000        397       784       914     6.6    13.1     15.2      
    8,000        717     1,292     1,442     9.0    16.2     18.0
   10,000      1,117     1,880     2,050    11.2    18.8     20.5
   15,000      2,475     3,716     3,926    16.5    24.8     26.2
   20,000      4,287     6,036     6,296    21.4    30.2     31.5
   25,000      6,480     8,756     9,046    25.9    35.0     36.2
   50,000     19,967    24,776    25,121    39.9    49.6     50.2
  100,000     52,160    63,396    63,811    52.2    63.4     63.8
  500,000    344,476   413,296   413,296    68.9    82.7     82.7
1,000,000    731,930   853,296   853,736    73.2    85.3     85.4
5,000,000  3,921,884 4,373,296 4,373,736    78.4    87.5     87.5
_____________________________________________________________________  
Normal tax
 rate (percent) 4        6         6         4        6       6

                          FOOTNOTE TO TABLE

     /1/ Maximum earned income assumed.

                      END OF FOOTNOTE TO TABLE

  EXHIBIT 4. ILLUSTRATION OF THE COMBINED EFFECT OF THE INCOME TAX, 
           SPENDINGS SURTAX, AND REFUNDABLE SPENDINGS TAX

                            Income $2,500

_____________________________________________________________________ 
                        Single person: Married couple: Married couple
                        No dependents:  No dependents: Two dependents
_____________________________________________________________________ 
Assumed spending on 
  consumer goods and
  services             $1,700  $1,300  $1,900  $1,500  $2,100  $1,700

Income tax (H.R. 7378 
  with lowered
  exemptions) /1/         365     365     270     270     175     175
Spendings surtax           70      30      --      --      --      --
                          ___     ___     ___     ___     ___     ___
Income tax and spendings
  surtax:
    Amount                435     395     270     270     175     175
    As a percent of 
      income            17.4%   15.8%   10.8%   10.8%    7.0%    7.0%

Refundable tax            170     130     190     150     210     170
                          ___     ___     ___     ___     ___     ___
Total, income tax, 
  spendings surtax and
  refundable tax:
    Amount                605     525     460     420     385     345
    As a percent of 
      income            24.2%   21.0%   18.4%   16.8%   15.4%   13.8%
_____________________________________________________________________ 

                          FOOTNOTE TO TABLE

     /1/ Exemptions: Single person, $500; Married couple, $1,000; 
Each dependent, $250.

                      END OF FOOTNOTE TO TABLE

       EXHIBIT 4A. ILLUSTRATION OF THE COMBINED EFFECT OF THE 
      INCOME TAX SPENDINGS SURTAX, AND REFUNDABLE SPENDINGS TAX

                            Income $5,000

_____________________________________________________________________ 
                        Single person: Married couple: Married couple
                        No dependents:  No dependents: Two dependents
_____________________________________________________________________ 
Assumed spending on 
  consumer goods and
  services             $3,200  $2,500  $3,500  $2,800  $3,800  $3,100

Income tax (H.R. 7378 
  with lowered
  exemptions) /1/         920     920     790     790     680     680
Spendings surtax          360     200     150      80      80      10
                          ___     ___     ___     ___     ___     ___
Income tax and spendings
  surtax:
    Amount              1,280   1,120     940     870     760     690
    As a percent of 
      income            25.6%   22.4%   18.8%   17.4%   15.2%   13.8%

Refundable tax            320     250     350     280     380     310
                          ___     ___     ___     ___     ___     ___
Total, income tax, 
  spendings surtax, and
  refundable tax:
    Amount              1,600   1,370   1,290   1,150   1,140   1,000
    As a percent of 
      income            32.0%   27.4%   25.8%   23.0%   22.8%   20.0%
_____________________________________________________________________ 

                          FOOTNOTE TO TABLE

     /1/ Exemptions: Single person, $500; Married couple, $1,000; 
Each dependent, $250.

                      END OF FOOTNOTE TO TABLE

       EXHIBIT 4C. ILLUSTRATION OF THE COMBINED EFFECT OF THE 
     INCOME TAX, SPENDINGS SURTAX, AND REFUNDABLE SPENDINGS TAX

                           Income $25,000

_____________________________________________________________________ 
                        Single person: Married couple: Married couple
                        No dependents:  No dependents: Two dependents
_____________________________________________________________________ 
Assumed spending on 
  consumer goods and
  services            $10,000  $6,000 $11,000  $7,000 $12,000  $8,000

Income tax (H.R. 7378 
  with lowered
  exemptions) /1/       9,626   9,626   9,336   9,336   9,046   9,046
Spendings surtax        3,400   1,400   2,400   1,200   1,800     700
                          ___     ___     ___     ___     ___     ___
Income tax and spendings
  surtax:
    Amount             13,026  11,026  11,736  10,536  10,846   9,746
    As a percent of 
      income            52.1%   44.1%   46.9%   42.1%   43.4%   39.0%

Refundable tax          1,000     600    1,100    700   1,200     800
                          ___     ___     ___     ___     ___     ___
Total, income tax, 
  spendings surtax, and
  refundable tax:
    Amount             14,026  11,626  12,836  11,236  12,046  10,546
    As a percent of 
      income            56.1%   46.5%   51.3%   44.9%   48.2%   42.2%
_____________________________________________________________________ 

                          FOOTNOTE TO TABLE

     /1/ Exemptions: Single person, $500; Married couple, $1,000; 
Each dependent, $250.

                      END OF FOOTNOTE TO TABLE

       EXHIBIT 4D. ILLUSTRATION OF THE COMBINED EFFECT OF THE 
      INCOME TAX, SPENDINGS SURTAX AND REFUNDABLE SPENDINGS TAX

                           Income $100,000

_____________________________________________________________________ 
                        Single person: Married couple: Married couple
                        No dependents:  No dependents: Two dependents
_____________________________________________________________________ 
Assumed spending on 
  consumer goods and
  services            $16,000 $11,000 $18,000 $13,000 $20,000 $15,000

Income tax (H.R. 7378 
  with lowered
  exemptions) /1/      64,641  64,641  64,226  64,226  63,811  66,811
Spendings surtax        7,650   3,900   5,800   3,300   5,200   3,000
                          ___     ___     ___     ___     ___     ___
Income tax and spendings
  surtax:
    Amount             72,291  68,541  70,026  67,526  69,011  66,811
    As a percent of 
      income            72.3%   68.5%   70.0%   67.5%   69.0%   66.8%

Refundable tax          1,600   1,100    1,800  1,300   2,000   1,500
                          ___     ___     ___     ___     ___     ___
Total, income tax, 
  spendings surtax, and
  refundable tax:
    Amount             73,891  69,641  71,826  68,826  71,011  68,311
    As a percent of 
      income            73.9%   69.6%   71.8%   68.8%   71.0%   68.3%
_____________________________________________________________________ 

                          FOOTNOTE TO TABLE

     /1/ Exemptions: Single person, $500; Married couple, $1,000; 
Each dependent, $250.

                      END OF FOOTNOTE TO TABLE