|COMMENTS ON THE PROPOSAL FOR A SPENDINGS TAX
1. PURPOSE OF TAX
 The proposed spendings tax should not be appraised in terms of peace time criteria. It should rather be appraised in the light of a fiscal policy appropriate to a wartime economy in which the supply of consumer goods is being drastically reduced at the same time that incomes are expanding rapidly; and in which the Government is spending unprecedented sums. The spendings tax has special merit in such a period that it would not have in ordinary times.
 A tax on consumer spendings might be designed a. primarily to raise additional revenues; or b. primarily to reduce consumer expenditures, and thereby inflationary pressure on prices, by attaching a penalty to spending that became more severe as spending increases.
 These two purposes are not entirely inconsistent: insofar as the tax yields revenue it withdraws purchasing power that would otherwise be available for expenditure; and the more revenue it yields, the larger the withdrawal of purchasing power. Nonetheless, the two purposes are to some extent inconsistent. The more successful a tax at any given rates is in inducing individuals to curtail expenditures, the smaller the revenue yield. High and steeply graduated rates may curtail expenditures so drastically as to yield less revenue than lower rates.
 The purpose that is considered primary is unlikely to affect the structure of the tax -- the tax base, the method of computing the tax base, and the like -- but it will greatly influence the levels of exemptions and rates, and the method of collection.
 The discussion that follows proceeds on the assumption that the two major fiscal alternatives to a spendings tax are either a general sales tax or further increases in the individual income tax.
2. APPRAISAL OF SPENDINGS TAX COMPARED WITH A RETAIL SALES TAX
 Viewed either as a method of raising revenue or as a method of controlling expenditures, the spendings tax is decidedly superior to a retail sales tax, IF THE SPENDINGS TAX IS COLLECTED CURRENTLY.
 The spendings tax, like the sales tax, places a direct penalty on spendings. Unlike the sales tax, however, it can easily provide exemptions and be progressive. It is therefore far more equitable than a sales tax.
 Progressive rates make it possible to enact a spendings tax that will make spendings in excess of any desired amount prohibitively costly. This is impossible under a sales tax without at the same time levying an intolerable burden on the great masses of the people. A spendings tax therefore permits a more selective control of expenditures than is possible under a sales tax.
 Because it takes account of the varying circumstances of individuals, through exemptions and graduated rates, a spendings tax is less likely to stimulate demands for wage increases. Individuals are all affected alike under a sales tax and are therefore more likely to make a concerted effort to secure higher wages.
 A sales tax is likely to enter into costs of production and therefore make price control difficult. In addition, it is likely to affect parity prices for farm products. A spendings tax has neither of these effects, since it is collected directly from individuals.
 A spendings tax would be much easier to administer than a sales tax since much of the labor of assessment and collection is carried out by the taxpayer himself and since it would be administered along with the individual income tax. A Federal sales tax would require the establishment of new and expensive administrative machinery.
 The only advantage of a sales tax over a spendings tax is that the payment of the tax is synchronous with the expenditure that gives rise to the tax. The consumer cannot escape awareness of the tax; and the tax is necessarily collected currently. From the point of view of controlling consumption, this advantage of the sales tax is fairly minor if the spendings tax is collected currently; it may, however, be decisive if the spendings tax is collected a year late.
3. APPRAISAL OF SPENDINGS TAX COMPARED WITH FURTHER INCREASES IN INDIVIDUAL INCOME TAXES
 Considered as a method of directly controlling consumer expenditures, the spendings tax performs a function entirely beyond the scope of the income tax. Considered primarily as a revenue measure, the spendings tax may be preferable to further increases in individual income tax rates, when the income tax rates reach extremely high levels. This point has probably not yet been reached. The margin is, however, much narrower than between the spendings tax and the retail sales tax, as the following listing of the advantages and disadvantages of the spendings tax indicates:
 1. It grants relief to expenditures for debt repayment, insurance premiums, and other fixed obligations connected with the purchase of assets or the discharging of liabilities. This is done by excluding these items from the tax base. If the spendings tax were added to H.R. 7378 without changing the individual income tax rates, relief would, of course, be given only with respect to the additional tax revenue. If it were desired to go farther than this, it would be necessary to reduce the individual income tax rates, and raise the revenue instead from the spendings tax.
 2. It raises revenue with a minimum of interference with voluntary bond purchases, since these purchases would be exempt from tax.
 3. It makes the tax to some extent voluntary, since the tax can always be escaped by reducing consumption expenditures.
 4. It puts a direct penalty on spending compared with saving, and therefore would be more effective in reducing consumer expenditures than an equal amount withdrawn from purchasing power through an income tax. If rates are graduated sharply enough, the expense of consuming beyond a certain amount can be made prohibitive.
 5. It taxes individuals who maintain consumption by drawing upon their capital, while an income tax cannot affect this type of expenditures.
 1. The tax base is smaller than under an individual income tax with the same exemptions because savings are exempt.
 2. It permits the accumulation of wealth without the payment of a tax.
 3. It involves an addition to the administrative burden and an increase in the complexity of the tax return that would be avoided by an increase in income tax rates.
4. SPECIFIC PROBLEMS OF THE SPENDINGS TAX
a. The tax base
i. Durable consumer goods
 For an expenditure tax conceived as a permanent part of the tax structure, the ideal treatment of durable consumer goods would be to treat the original purchase as an investment, including only the imputed income from the goods in the tax base. This treatment is not, however, administratively feasible. An approximate equivalent would be to include only actual expenditures in the tax base, whether these expenditures were in a single lump sum or in installments. This would permit expenditures on durable goods bought on the installment plan to be spread over more than a year, diminishing erratic fluctuations in the tax and avoiding undue burdens upon persons who make large outlays on durable consumer goods in a single year.
 However, in connection with the present emergency, it is desirable specifically to discourage large present outlays on consumer durable goods. For this reason it is proposed to include in expenditure the entire purchase price of durable consumer goods (except houses) at the time of purchase, exclusive of any interest separately stated.
 Dwellings owned by the occupant present a more difficult problem than other consumer durable goods because of the large part of total expenditure involved in this single item, the relatively long period of serviceability, and the importance of avoiding undue discrimination between renters and owners. Ideally the imputed rental value of an owner-occupied dwelling should be included in both income and expenditure. British income tax practice actually does include this item in income. Because of lack of administrative experience with this type of treatment, possible misunderstanding on the part of the taxpayer, and political opposition, it does not appear feasible to adopt this treatment immediately in this country.
 The two main alternatives are (1) the inclusion in the tax base of all rent and of all of a home owner's current outlays except repayment of mortgage (interest on mortgage, property taxes, insurance, and repairs); (2) the exclusion from the base of both rent paid by tenants and current expenses of the home owner. The choice between these two alternatives depends not only on considerations of equity but also on the desirability of establishing an incentive to economize housing as well as other consumption items.
 The first alternative, the inclusion in the tax base of as much of the housing expenditure as is feasible, is recommended for the following reasons: (1) Like all other items, housing will be scarce relatively to money demand. Excluding housing expense from the tax base would make it an attractive avenue of expenditure and increase the demand for it. (2) While housing is relatively fixed in supply, and there is no need to force tenants to vacate existing living accommodations, this is unlikely to occur to any great degree. A large part of the population will be either exempt from tax or will pay a relatively small tax. For the rest, the tax would merely serve to reduce a demand that, at current prices for housing, exceeds the supply in many localities. (3) The exclusion of housing expenses from the tax base would require lower spending tax exemptions in order to reach the same group of persons and higher rates to raise the same revenue. (4) The exclusion of housing expenses would raise a difficult problem of segregating such expenses from others. Rent may or may not include heat and light, garage, furnishings, personal services, etc. To achieve uniformity, it would probably be necessary to exclude expenditures for gas, electricity, and fuel as well as direct expenditures for housing. (5) The special reason for the exclusion of housing expenditures might not be clearly understood, with the consequence that there would be great pressure to exclude other categories such as food. (6) The inclusion of housing expenses does involve discrimination between owners and renters. Their exclusion, on the other hand, would involve discrimination between persons who spend a relatively large part of their income on housing and persons who spend a relatively small part of their income on housing.
b. The taxpayer unit
 One of the most important technical problems in the spendings tax is the proper definition of the tax unit. Since the tax is graduated, and since gifts are permitted as a deduction, the higher rates can be avoided, if no contrary provision is made, by transferring funds to other members of the household and having them pay for part of the family expenditures. Such avoidance would not only create inequities, but would reduce the effectiveness of the tax in controlling the distribution of consumer goods.
 The treatment which appears most desirable is to permit married couples to file either joint returns or separate returns, at their option, but to require single persons and married persons filing separate returns to compute their tax according to a schedule in which the amounts of expenditure subject to the successive rates of tax are only half of those provided for married couples filing joint returns. To prevent avoidance through transfers to dependents, gifts to minor children or other dependents (except the spouse) would not be allowed as a deduction in computing the expenditure of the taxpayer. All expenditure of dependents would be required to be included in the taxpayers' return.
 A treatment which is somewhat less satisfactory is to require married couples to report their combined expenditure in a single return, and to compute the tax under the same rate scale as is used by single taxpayers. The same provisions would apply to gifts and the expenditure of dependents as in the first treatment. This treatment would limit the differential between the expenditure of a single person and a married couple to the amount of the difference in personal exemption, and would permit a single individual having a moderately high expenditure to spend almost as much as a married couple before being subjected to a given rate of tax.
 The treatment which is least satisfactory is to follow the provisions of the existing income tax, that is, provide for either joint or separate returns at the option of the taxpayer, with no compensating differentiation of the rate schedule. To prevent almost universal splitting up of incomes it would be necessary to extend the restriction on gifts to the spouse as well as minor children and dependents. It is likely that such a restriction would work substantial hardship in those cases where large gifts are made for purposes other than tax avoidance. If the deduction of gifts were allowed, it would be relatively easy for all informed taxpayers to split their expenditures into two returns, and thus achieve substantially the relative effect of the first treatment suggested, except that the general level of rates might be somewhat lower.
c. Simplified returns.
 Simplification of the return form to be used by the bulk of the taxpayers at the lower income and expenditure levels is more difficult than for the income tax. To base the tax on a presumed expenditure related to gross income would be extremely crude and would remove most of the effect of the tax in reducing the desire to spend. Probably the best solution would be to require the calculation of the tax in all cases, but to provide an optional brief return containing only the most frequent sources and uses of funds.
d. Filing requirements.
 If exemptions and credits for dependents are the same for the expenditure tax as for the income tax, some persons will be required to pay an expenditure tax who do not have to pay an income tax, and many who must pay an income tax will not have to pay an expenditure tax. If the two tax returns are to be combined on one form, it is desirable that all persons having gross receipts from all sources, gross income, or a total expenditure in excess of the personal exemption applicable be required to file a return for both taxes.
e. Anticipatory buying
 Since if a spendings tax is to have any important effect the rates must be fairly high, even at the lower end of the scale, anticipatory buying is likely to be a serious problem when the tax is first introduced. When excise taxes are raised on specific commodities anticipatory buying is not inconsiderable, and is felt even at the relatively low rates of such general sales taxes as have been imposed. At the higher marginal rates of the proposed expenditure tax, the incentive to buy anything readily storable will be extremely great.
 One method of reducing the incentive for such buying is to require the initial return to cover not only the first taxable year, but also the period between the announcement of the tax proposal and the effective date of the tax. If expenditures during this period were at a considerably higher rate than during the first taxable year, the taxpayer could be required to include the excess in his tax base. The chief defect with this method is that some taxpayers may not have records of their bank balances, cash on hand, etc., for a period when they were not on notice that such information would be required.
i. Hoarded cash
 It will be almost impossible to check adequately the amount of cash reported as on hand at the beginning of the initial taxable year, and some tax may be evaded through the understatement of this item. On the whole the item is not likely to be large. In addition, it will be less important in later years, since any attempt to overstate cash held at the end of one year will require the reporting of a like amount at the beginning of the following year. The taxpayer who claims an excessively high amount of cash remaining at the end of the year may be required to produce it or account for it.
ii. Information at source
 To provide an effective check on the returns filed by taxpayers, information returns will be required in much greater number than for the income tax, and by a much larger number of informants -- including all banks, savings organization, insurance companies, and the like. These additional returns will frequently be for small amounts, and the task of collating them will be difficult. It is doubtful whether much more than a sample check can be obtained with a reasonable expenditure of administrative effect.
 However, it should be noted that in most cases expenditures will bear a reasonably close relationship to income; and that it is likely to be immediately apparent whether a return requires special auditing.
5. RATE SCHEDULES
 The height and mode of graduation of the rate schedule for an expenditure tax depends both on the amount of revenue required and the degree to which the tax is to be used for consumption rationing purposes. The following schedules are samples of what might be required for various purposes.
_____________________________________________________________________ Expenditure brackets _________________________________ Single persons Married couples Schedule Schedule Schedule and married filing I II III persons filing joint returns separate returns _____________________________________________________________________ $ 0 $ 250 $ 0 $ 500 10% 10% 10% 250 500 500 1,000 10 15 20 500 1,000 1,000 2,000 15 20 40 1,000 1,500 2,000 3,000 20 30 60 1,500 2,000 3,000 4,000 25 40 80 2,000 2,500 4,000 5,000 25 40 100 2,500 3,000 5,000 6,000 30 50 150 3,000 3,500 6,000 7,000 30 50 200 3,500 4,000 7,000 8,000 30 50 200 4,000 5,000 8,000 10,000 30 50 250 5,000 12,500 10,000 25,000 30 75 300 Over 12,500 Over 25,000 30 100 300 _____________________________________________________________________
 The expenditure brackets for single persons and persons filing separate returns are half of those for married couples filing joint returns. Schedule I represents a schedule designed primarily to raise a relatively small amount of revenue, with the effect in discouraging consumption spread fairly evenly throughout the whole income range. Schedule II is a schedule designed to yield a moderate amount of revenue, still without any sharp rationing effect. Schedule III is a schedule which would raise a substantial amount of revenue, and at the same time severely inhibit consumption much in excess of $5,000, although it may prove necessary to continue the graduation of the rates still further above the $10,000 level in order to inhibit the consumption of the wealthy who can afford to pay several fold to retain their consumption near their accustomed levels.