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3. The spendings tax ought to offer considerable political appeal. Because of a general feeling that liability under the tax would be to some extent voluntary, sentiment is likely to favor it in lieu of increases in the rates of income tax designed to yield the same revenue. Exemptions of the income tax type would appeal to those who hesitate to support a sales tax because of its regressivity.

4. The Treasury has been concerned with the necessity of granting relief, under proposed income tax rates, to those with debts and certain other contractual savings obligations like insurance premiums, etc. If this concern is justified, one advantage of making up the revenue deficiency in the present tax bill by a tax on spending is that relief would automatically be grated to those standing in need of it. Money expended in the repayment of debt or for the building up of savings through insurance would not be included in the spendings tax base. Since it is not entirely clear how much, if any, relief ought to be given in these cases, it could be argued that the automatic relief granted under the spendings tax substantially reduces the need for further concession.

5. Certain inequities which threaten to become more serious under higher income tax rates than they are at present would be eliminated or alleviated if the additional revenue were raised by a spendings tax. An example of this is the arbitrary treatment of income from trusts.

[32] DISADVANTAGES OF THE SPENDINGS TAX AS COMPARED WITH A FURTHER INCREASE IN INCOME TAX RATES

1. A disadvantage of substituting a spendings tax for further increases in the income tax would be that some individuals would have a lower combined tax liability. If they sharply curtailed spending, their tax on the spending which they could not avoid might be considerably less than their additional income tax would have been had that alternative been chosen. Therefore, although to this extent consumption is successfully restricted, such individuals could hoard savings at a time when that purchasing power ought to be made available to the Government in the form of taxes.

2. The effectiveness of the spendings tax in limiting consumption would be reduced by the difficulty of causing consumers to associate particular purchases with spendings tax liability. It is not practicable to collect a flat percentage on all spending because (1) an enormous number of refunds would have to be made to the millions of families below the exemption, and to take account of that part of the spendings of all families and individuals which is below the exemption, and (2) the object of the proposed tax is to determine spending indirectly.

[33] One method of stimulating awareness of the tax might be to collect under an income withholding tax an additional tax at a flat rate somewhat below the lowest spendings tax rate. Unfortunately such a spendings withholding tax would be closely associated with the income tax, and since spending would be regarded as presumptive, the device could not be effective. Furthermore, many of the receipts items under a spendings tax (e.g., funds received in repayment of debt, new borrowing, gifts, etc.) are not subject to withholding.

[34] It has been suggested by Dr. Groves that awareness of the spendings tax could be developed by tying it in with the voluntary bond buying campaign. Publicity could be given to the desirability of avoiding spendings tax liability by purchasing bonds currently out of income. In the absence of a direct penalty on buying (as under a retail sales tax) considerable results might be achieved by combining the arguments against spending and those in favor of saving in the form of government bonds.

THE RELATIVE MERITS OF A SPENDINGS TAX AND A GENERAL SALES TAX

[35] For the following reasons the spendings tax may be considered preferable to a general sales tax: 1. Insofar as sales taxes apply at stages earlier than the consumer stage, personal exemptions cannot be given. A retail sales tax, applicable only to consumers' goods, can provide personal exemptions either by exempting commodities primarily consumed by the relatively poor, or in the form of stamps permitting the tax-free purchase of a stated dollar amount of goods and services. The first of these methods suffers from the defect of requiring payment of tax on articles not specifically exempted even when they are bought by the poor. The second involves a considerable nuisance both to retailers and to consumers; an outright grant of cash would operate more smoothly, but would suffer from the stigma of resembling a dole. Under the spendings tax the personal exemption is much more easily granted, a fact which is of considerable importance to those who oppose the sales tax on account of its regressivity. 2. Sales taxes enter into the price of commodities unless they are limited to the final consumer stage and are quoted separately. Consequently they are often considered inflationary on the ground that (1) it is difficult to fulfill these stipulations, (2) labor contracts frequently provide for higher wage rates in the event of a rise in the cost of living, and (3) one element in the determination of farm parity payments is the price farmers pay for the goods they buy. The spendings tax bears no such direct relation with prices. Although unions might make a spendings tax the occasion for wage demands on the ground that labor's dollar buys less, there is little reason to think that the incentive would be much stronger under the spendings tax than under the income tax. 3. A sales tax, other than one paid solely by the ultimate consumer, enters into cost of production. Once price controls have been set up, therefore, the introduction of a sales tax which does not carefully exclude from the base all items entering into cost is calculated to upset the controls. The spendings tax has the advantage of avoiding this difficulty, and on this count is superior to any but the most scientific sales tax in a period when price controls are already threatened by excessive spending relative to the availability of goods and services. 4. Studies made in the Division of Tax Research indicate that a sales tax is difficult to administer, requiring an entirely new body of collectors, auditors, and other personnel. Again, new business machines, typewriters, and possibly metal tokens would be needed on the introduction of a retail sales tax. Under a spending tax, on the other hand, a very large proportion of the labor of assessment and collection is carried out by the taxpayer himself, and at no great additional cost to him in time and effort.

DISADVANTAGES OF THE SPENDINGS TAX AS COMPARED WITH A RETAIL SALES TAX

1. Aside from the inflationary aspects of the general sales tax alluded to above the spendings tax is inferior to the sales tax as an anti-inflationary device. The exclusion from the tax base of spending of ALL families to an amount of about $1800 (assuming two children per family, and an exemption for married persons of $1000) on a recent rough calculation would have removed in 1941 about $47 billion of spendings from a potential spendings tax base of $72 billion. Yet some such exemption, though preferably one not so high, is necessary on grounds of equity, politics, and administration. 2. As stated above, it appears difficult to force consumers to be aware of spendings tax liability as the time of spending. A separately quoted retail sales tax would not suffer from this defect.

THE SPENDINGS TAX IN RELATION TO GENERAL RATIONING

[36] A spendings tax is certain to reduce spending below what it would have been in the absence of the tax. Even at a time of rising income a tax of which the minimum bracket rate is 10 percent will in general discourage consumption by virtue of the penalty it imposes on the act of spending. In addition, to the extent the tax is paid, purchasing power is reduced.

[37] Such a tax cannot replace the need for general rationing, however, because (1) many billions of dollars of spending are untouched by the tax, and (2) graduation of the tax by spendings brackets can only discourage, not prevent, spending beyond the volume of goods available. Consequently, although a spendings tax would facilitate the task of general rationing, it is by no means a substitute for it. Treasury Department, Division of Tax Research July 9, 1942