|THE SPENDINGS TAX
I. THE NEED FOR A SPENDINGS TAX
 In order to satisfy the demands of our armed forces we shall shortly have to be using more than half of our men, machines, and materials to produce instruments of war. This will leave less than half to produce goods and services for current consumption -- food, clothing, housing, recreation, and the like. But while less than half of our resources will be used to produce goods available for civilian purchase, the enormous combined income from both civilian and military production will be available to spend on civilian goods.
 Individuals will be receiving incomes for their works and for the use of their property whether they are employed in producing war goods or civilian goods. They will be receiving incomes for producing goods that they cannot buy. The result is that we shall have a steadily increasing flow of incomes at the same time that we have a steadily diminishing supply of goods on which these incomes can be spent.
 The basic process which simultaneously produces the paradox of a shortage of goods and an abundance of money and which therefore threatens us with inflation, can be explained very simply. Yesterday, Mr. Jones was fastening heels on ladies' shoes; today, he is fastening heels on the Army shoes of our soldiers. Yesterday, Mr. Smith was waiting on tables in the neighborhood restaurant; today, he is at a machine in the new airplane factory. Millions of Smiths and Joneses are doing the same thing. They no longer produce goods and services that we as civilians can buy. The goods they produce must go to war. As a result, we must do without many of the comforts, and some of the things we like to regard as necessities of life. The things we must do without, together with harder work than we have ever done, are the price we as civilians must pay to win this war.
 That is only part of the story. At the same time that about half of our economy is producing planes and guns that we civilians cannot eat, or wear, or otherwise use, the Smiths and Joneses who are working in that sector of the economy are earning more money than ever before. So the dwindling supply of civilian goods and services is confronted, not with a shrinking or even a steady volume of purchasing power, but rather with a great and growing volume of purchasing power. Unless the pressure of that spending power is reduced by taxes and by voluntary savings, price control and rationing barriers cannot hope to hold it in check.
 Left to their own devices individuals will try to buy more goods and services than are available. On the basis of available estimates for 1943, it is expected that they will try to spend $85 billion on $70 billion of goods and services. Unless this surplus buying power is kept off the market for consumer goods, it will strip the store shelves of goods and exert overwhelming pressure on the price ceilings established by the Office of Price Administration.
 One effective way of keeping excess money off the market for consumer goods is through the use of taxation. Taxes can remove this money by taking it away or by penalizing spending so that people will not wish to spend.
 Taxes have already been increased very sharply in recent revenue acts. They are nevertheless still inadequate. Even after paying all the taxes now on the statute books, individuals will still be trying to spend more on consumer goods and services than are available for them to buy at present prices.
 Major reliance has so far been placed on the personal income tax for purposes of personal taxation. This is the fairest tax that has yet been developed. It exempts persons with low incomes and taxes others at progressive rates -- that is, at rates that are higher the larger the income. It allows a greater exemption for families than single persons, and greater exemptions for large families than for small ones. But although the income tax can be used still further, it does not meet all the needs of the present situation. In the first place, it is difficult to extend the income tax indefinitely without imposing undue hardship on persons with large fixed obligations to repay debt, to pay insurance premiums or to make other types of regular savings. Expenditures for these purposes do exert little, if any, inflationary pressure on prices.
 To meet the current situation, the Treasury has proposed as a supplement to the individual income tax a new tax known as the spendings tax. The spendings tax can be used beyond the point to which the income tax can be pushed without sacrifice of equity. It retains the basic features of exemptions and progressive rates that have made the income tax so acceptable to democratic peoples.
II. DESCRIPTION OF THE SPENDINGS TAX
 The spendings tax is aimed directly at the root of our present problem, excess spending. It is levied on the amount that individuals spend on consumer goods and services. The spendings tax does not apply to savings. Furthermore, it exempts certain amounts of spendings so that a tax is payable only if spendings exceed specified minimum accounts. These exemptions depend on marital status and the number of dependents. The spendings tax is levied at progressive rates so that the larger the amount spent, the larger the tax and the higher the tax rate the individual must pay on any additional amount spent.
 If a person spent less than the exempt amount he would pay no tax. In case he spent more he would have a tax to pay. For example, if he spent $500 in excess of the exemption he might be required to pay a tax at a relatively low rate. If he spent $5,000, he would pay a tax at a very much higher rate on his additional spendings.
 The amount individuals spend in the course of a year can be determined without detailed records of personal expenditures. It can be determined indirectly and simply. The amount an individual spends is necessarily equal to his income minus the amount he saves or plus the amount he draws from previously accumulated savings. The individual would figure the amount of his spendings by subtracting from his income the amount of savings or by adding to his income the amount he has spent by drawing from his previously accumulated savings. The steps involved in figuring the amount of spendings can be readily illustrated. Mr. Jones has an annual income of $2,000. His savings and other non-taxable expenditures for the year consist of:
1. Increase in cash and bank balances
 Mr. Jones spent during the year for consumers' goods and services the difference between $950 and $2000 or $1050. The amount of his taxable spendings would be determined by the excess, if any, of his spendings over his personal exemptions. These calculations would be made at the same time and on the same form as the income tax.
 During the taxable year provisional amounts would be collected from the taxpayer's income in order to assist him in meeting the tax. The amount collected would depend upon the size of the individual's income, the exemptions to which he was entitled, and the rate of collection. Collection of the spendings tax at source could be tied in with collection of the income tax.
 Amounts collected at source would be credited against the amount of tax owed as determined at the time the spendings and income tax returns were filed. In case the provisional amounts collected with reference to the spendings tax exceeded the spendings tax due the taxpayer would receive that much more credit against his income tax. If amounts collected at source exceeded the taxpayer's combined spendings and income tax, the excess would be refunded to the taxpayer promptly.
 In those cases where collection at source is not feasible, individuals would file quarterly returns. In these quarterly returns they would report and pay tax on the approximate amount of spending during the preceding quarter. A final adjustment would be made after the close of the year. These devices would enhance the value and flexibility of the spendings tax in meeting war needs.
III. ADVANTAGES OF THE SPENDINGS TAX A. CONTROL OF INFLATION.
 As has been indicated, the spendings tax strikes directly at the inflationary problem. That problem arises because the war production effort is vastly increasing the amount of individual incomes at the same time that it reduces the supply of goods and services available to civilians. The record volume of spendable income, in view of the shortage of goods and services, is exerting a pressure which threatens to disrupt price ceilings. The spendings tax is an effective instrument for relieving this pressure.
 The spendings tax strikes directly at the problem by discouraging spending. It imposes a tax penalty on excess spending and this induces consumers to spend less and save more. The penalty increases with each addition to spending. In the case of near necessities and modest luxuries the tax is light or moderate. For additional spending at luxury levels the tax is heavy.
 The spendings tax also helps control inflation by raising revenue. It takes away from consumers money which they otherwise might spend. In this respect it acts like any tax, decreasing the amount of buying power available to demand scarce goods and services. If an individual spends despite the penalty involved, he must pay a tax, thereby contributing to tax revenue and absorbing spending power.
 The spendings tax safeguards our system of price controls. It does this in two ways. First, it does not apply to expenditures incurred in connection with production or other business activity. Therefore, it does not enter into costs and does not create problems of price adjustment. Second, the spendings tax is not an additional to the prices of specific commodities or prices of commodities in general. It avoids subjecting all consumers to a blanket increase in the cost of living. Therefore, it does not nullify measures of price stabilization designed for the consumer's protection or undermine consumers' reliance on these protective measures.
B. EFFECTS ON WARTIME PRODUCTION
 The spendings tax exempts those whose standard of living cannot be lowered without impairing their productive efficiency. Because it is not levied at the expense of the health, vigor and morale of workers, it helps to maintain the flow of production. This will help to provide guns, ships, planes, and tanks for the fighting fronts and at the same time consumer goods and services in adequate volume to meet the needs of the home front.
 The spendings tax protects the worker's incentive to produce and earn at a time when incentives to maximum production are of crucial importance. Since it exempts savings, it permits the worker to retain, free of additional tax burden, that part of his earnings which he saves. This enables the worker to set aside part of his pay for use in the future when goods and services are again abundant, and when he can buy them without injuring both himself and the national effort. In the final analysis this is the only way to reward the worker when, due to wartime scarcities, it is not possible to offer him goods available today. Thus the spendings tax is designed to give the worker the benefits of his earnings but to discourage him from using his earnings in ways which will increase the strain on the economy.
C. EQUITABLE DISTRIBUTION OF BURDENS
 In time of war the spendings tax adds an important element of fairness to the tax system. As has been indicated, major reliance can be placed on the income tax as a means of equitable sharing of burdens. The income tax occupies and should continue to occupy the chief role in our tax program. However, in order to meet the special needs of the wartime situation, it is desirable to supplement the income tax with the spendings tax.
 In time of war, as has been noted, the supply of goods and services is being diminished at the same time that incomes are being increased. In the normal course of events the diminishing stock of goods will go to those willing and able to pay the highest price for them. In the process the working population would be deprived of the necessities of physical well-being.
 Under the spendings tax, however, fair principles would govern the distribution of goods and services. The basic features of exemptions and progressive rates would provide everybody with basic consumption free of tax and would make it increasingly costly to consume more. Thus the spendings tax is a means of effecting a more equitable distribution of scarce commodities. It has the effect of making the cost of goods vary according to the individual's expenditures.
 This reduces the inequality in bargaining position among persons with different amounts of income in the markets for consumer goods, an inequality which would be aggravated to an intolerable degree by wartime relationships between supplies of goods and buying power. Under the conditions which buyers would have to take into consideration under the spendings tax, buying would more accurately reflect need rather than superior wealth and goods would tend to be distributed according to individual needs and tastes.
 By exempting funds used to pay debts, mortgages, insurance premiums and the like, the spendings tax avoids unnecessary hardship. Persons who are compelled to live on a narrow margin in order to meet these obligations would find their tax liability reduced accordingly. Yet this method of protection for individuals with special obligations is fair to individuals who do not happen to have such debts to pay, since the latter can obtain the same tax advantage by saving in other forms, such as the purchase of War Bonds.
 Under the spendings tax the individual has a considerable degree of choice as to the amount of tax he is to pay. To the extent he can choose how much he is to spend, he has an important degree of freedom in adjusting his tax burden and his spendings to his own special needs and circumstances.
 Another feature deserves attention. If we depend entirely on the income tax, many persons may attempt to avoid wartime sacrifices and maintain peacetime standards of comfort luxury by drawing on accumulated savings. By using funds from this source, they would obtain for themselves an undue share of scarce goods at the expense of those who have no savings which they can spend. The spendings tax would place an equitable restraint on this practice.
 Certain types of expenditures may be allowed as deductions under the spendings tax. Some forms of expenditure may indicate distress or may have special social importance. Examples which may be cited are medical expenses and expenditures for training and the acquisition of skills, education, and self-improvement. These are types of expenditures which it is desirable not to penalize. In order to achieve greater equity and prevent hardship, special recognition may be given these items by allowing their full or partial deduction.
 The spendings tax avoids the inequity which may develop as a result of the piling up of burdens on the insecure war worker who is increasing his income on the basis of overtime and holiday labor and who is laying aside as much as he can against the time when his job will be finished.
 At the time when excessive spending threatens the stability of the economy, the spendings tax imposes its burden on those who are doing the spending, and particularly on these who are doing that kind of spending which can be curtailed with the least hardship and interference with product efficiency.
D. POST-WAR SECURITY AND STABILIZATION
 The spendings tax is a wartime measure, but its beneficial effects may be projected into the transition from war to peace and into the following years.
 The spendings tax stimulates savings. These savings give the individual an increased measure of security against possible future loss of job or income. The combined savings of many individuals create a backlog of purchasing power which can be released in the post-war period, when the production of consumer goods can again be increased and controlled release of spending power will serve to maintain and stabilize production and employment. During the critical period of transition from war to peace the spendings tax would serve as a means of controlling (a) the rate of release of accumulated purchasing power and (b) the rate of readjustment of spending and saving habits.
E. ADMINISTRATIVE CONVENIENCE AND SIMPLICITY
 The spendings tax enters a new and important field of taxation. Nevertheless, it does not require an expensive additional administrative setup but can be administered almost entirely on the basis of the existing income tax organization. Savings, accumulated as a result of the spendings tax, may be invested in War Bonds, savings accounts, or in other ways which the individual may choose for himself and which may be handled by existing institutions and channels of investment.
 The administration of the spendings tax would be made easier by public understanding and cooperation. The dangerous significance of excessive spending under wartime conditions is widely realized. Public appreciation of the function of the spendings tax and its fairness, should lead to cooperation in its application thus easing the tasks of administration and compliance.
 New and rapidly changing conditions demand new, or at least especially adapted and flexible tax measures. The spendings tax is not a new proposal. It has long been advocated by a number of outstanding authorities and statesmen of different shades of opinion. Present consideration of the spendings tax, however, is prompted by the fact that such a measure is especially appropriate under wartime conditions. It fits the requirements of the present situation, whether these requirements are viewed primarily in terms of equity among individuals or primarily in terms of promoting war production.
 In actual practice these requirements cannot be dissociated because if the most threatening form of inequity, the inflationary process of distributing scarce goods and services, is not avoided, vital production will inevitably suffer. The spendings tax both measures up to the principle of democratic sharing of the war burden and promotes rather then hinders the production we need.
 Without making unreasonable demands on scarce men and machines, the spendings tax can be readily integrated into our tax structure. It also has the virtue of flexibility and can be adjusted to meet future conditions arising in the accelerated tempo of wartime developments.
 Most important, the spendings tax will preserve for the individual the maximum degree of freedom of choice as a consumer, and enable him to be to a substantial degree his own tax-assessor. Certainly, this result would be vastly preferable to the alternatives of a more rigid form of tax, regimentation under direct controls, or the destructive process of inflation.