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It is apparent now that it was a great mistake to reduce the income taxes and fail to extinguish, or almost extinguish, the public debt in the booming '20's. It is apparent also that with the return of prosperity the present income tax rate -- which are almost as high as those of 1918 -- should be very productive, particularly if we have a substantial rise in prices, and even more so, if we have a substantial excess profits tax combined with the income tax.

The greatly reduced graphs or figures in this folder are sown on larger scale in separate folder. That folder contains also larger charts and tables not reproduced at all in this folder.

SECTION II

FUTURE ROLE OF INCOME TAX

II Future Role Of Income Tax

Some Fundamental Principles

How much should be raised by Federal taxes next year or in the next few years? In particular what role should be played by the income tax in the future, and how should it be modified or revised to enable it to play that role? Sound answers to those questions must rest upon sound principle which we rest always loop in mind. A few of these may be recalled before specific measures are discussed.

Government is one of the many cooperative organizations which the people have established to meet certain needs more effectively than they can be met in any other way. Taxes are contributions to enable it to perform its proper functions; the amount of taxes collected should be determined by the answer to the question: Can another dollar promote the general welfare most if left in the hands of the individual citizen or if contributed by him to the Government to increase its cooperative services?

To what extent should income taxes be used to secure these contributions? To the extent that they will secure most effectively the socially least useful private dollars for socially more desirable public use. For reasons discussed below (pages 37-40) income taxes should continue to play a large and increasing role in the modern industrial state, though experience indicates that property, excise, inheritance, and other taxes are superior to income taxes under certain conditions.

The fundamental economic problems of both private and public economy are the maximization and proper distribution of goods and services among the people and particularly the accumulation of proper reserves in fat years and their preservation and proper distribution over lean years. The political difficulties of properly controlling expenditures, safeguarding reserves, and distributing all most effectively are baffling beyond description.

Public finance is an extremely important part, but only one part, of the entire economic organization and process. All parts are interdependent. Adequate public revenues rest upon a well-coordinated and prosperous economic system. If business is not prosperous, if the masses lack employment, if the banking and currency systems are unsound, if the economic organization as a whole is seriously defective and uncoordinated, there is no foundation for sound and adequate Government finance.

Moreover, sound financial management requires a political genius that is rare among most peoples. It requires that the real leaders -- industrial, financial, and political -- and also the masses, to the greatest extant attainable, shall not discount the future too much, that they shall often be willing to sacrifice immediate narrow gains for long-run general welfare. This is not suggesting the probability of an early and universal adoption of the Golden Rule as a matter of general political and business practice but rather the necessity of a policy of enlightened selfishness, at least, as a condition of progress. But how many business groups, how many statesmen, how many nations are able to follow a long-time policy of truly enlightened selfishness? The very few that can thus cooperate have economic wisdom, financial acumen and political genius. The great remainder are mediocre or worse.

The proper allocation of functions and coordination of Federal, State, and local financial systems is a necessary prerequisite to the best financial policy in each jurisdiction. /4/ While the choice of taxes in each jurisdiction will turn largely upon questions of equity, fiscal adequacy, and political expediency, more or less direct and indirect economic, political, and social interactions must always be take into consideration. For example, if we are considering the relative merits of additional income taxes VERSUS sales taxes as means of raising a necessary billion or half billion of a additional revenue, we should consider, of course, such requisites as equity, adequacy, feasibility, etc., and also such question as how each will affect production, consumption, saving employment, business fluctuations, inflation, banking policy, and a multitude of relations conditioning the general welfare. It my well be that one of these taxes will best meet the combination of tests used to raise a certain fraction of the total required, whereas another tax, or some other group of taxes, will be best adapted to raise the remainder. /5/

Interdependence Of Taxes And Public Credit. -- How much the Government should spend this year, and of what it spends how much should be raised by taxes and how much by borrowing depend chiefly upon a comparison of current and prospective needs and current and prospective incomes. The greater assurance we have of an early, substantial, and progressive recovery, the more we can safely spend now, and also the more we can safely raise through either taxes or borrowing, or both. The extent to which taxes rather than bonds should be used to meet such expenditures as are wise depends largely on the effect of each upon spending and also on the effect of alternative policies on recovery. Too heavy and, especially, ill-advised taxes may be deflationary, may check recovery, and may defect the purpose of all economic effort, including that of the Government. On the other hand, inadequate taxation and too inch borrowing would be inflationary, injurious to Government credit, and equally or more destructive of recovery than heavy taxation. The history of the past has shown that Governments -- as well as private individuals -- have usually been prone to borrow too much and unwilling to support their current expenditures and especially their credit by adequate taxes.

In formulating proper financial policy it is, therefore, clear that it is quite important to take special precautions not to borrow too much and to support necessarily heavy emergency expenditures and particular public credit with a resolute determination to provide adequate taxation. While great care should be taken to choose the most equitable taxes that are administratively feasible and fiscally adequate, there should, however, be no shrinking from the main issue. Taxes of the best kinds available, whether popular or not, must be adequate to meet really urgent expenditures that cannot be met properly by borrowing. This means that public credit must be maintained at all hazards. Such taxes as these are not popular and never will be popular, but real statement must face realities and, if necessary leave popular acclaim to history.

Temporary Expedient Or Permanent Tax?

Does Depression Record Condemn Income Tax? -- How does the income tax square with the requirements outlined above? Is it, like many earlier war emergency taxes to be discarded now that the war is over? During the depression of the past five years its yields have fallen to fractions of previous results; it has had to be supplemented by other taxes with more stable yields, and still the Federal deficit and the National debt have mounted. Some interests, always opposed to income taxes anyway, have seized upon this opportunity to emphasize the instability and undependability of the income tax and to advocate its repeal, or at least its relegation to a role of minor importance, and its replacement by sales and other taxes. Even more strongly, this same group and its allies have argued for the wholesale reduction of practically all Government expenditures and the radical cutting of all taxes.

Rise Of Income Tax In The United States. -- The history of the income tax movement in this country perhaps throws more light on the probable future role of this tax than does oven the short sketch of National tax history outlined earlier.

The income tax was first made a part of our National tax scheme during the Civil War. It played a manor and belated, though an important part, in that period, but it was repealed after that emergency and not resorted to again till the troubles times or the 1890's. It was adopted at that time as a part of great movement that produced the State granger and anti-railroad laws, the Federal Interstate Commerce Act, the Sherman Anti-Trust Act, and the pro- longed attempts at tariff reduction and free silver. The income tax of 1894 proved abortive, being nullified by the Supreme Court in 1895 as an unapportioned direct tax, but this decision frustrated and delayed the movement only temporarily. The popular pressure for it was too strong to resist. Congress submitted a constitutional amendment and enacted a corporation excise tax measured by income in 1909. The amendment was ratified by the required number of States by February 1913, and the law initiating our present income tax was passed later in the same year.

Emergency Or Permanent Basic Tax? -- Our income tax is not, therefore, merely a hastily conceived emergency war measure to be given up as soon as the emergency is over. It is true that war necessities suddenly gave it a dominance in the Federal System that would otherwise have been reached only gradually. But the modern income tax is the product of a long and fundamental evolution. The tosses of people and their representatives have seen the phenomenal growth of industry, of cities, with their large corporations, trusts, incomes, and other numerous evidences of wealth. They no longer believe that agricultural land and a few commodities of mass consumption should continue to bear almost all, or even the major part, of State and Federal taxes. They expect those who draw large incomes from national and international sours to supplement the revenues furnished by local sources. There is not a single significant indication that they will give up lightly or soon such an important levy as the income tax, one for which they struggled hard and long and one which serves perhaps to mitigate rather than to exaggerate the harsh injustices of fortune and the even more irritating injustices of those who have controlled industry and government in the modern economic regime.

Therefore, despite some severe criticisms of its instability of yield, and despite numerous other weaknesses and complexities of administration, the income tax appears destines to remain the most important single source of Federal revenue for some years to come. It is true, of course, that every effort should be made to correct its faults, and it is also certainly desirable to supplement it with other taxes which will offset some of its deficiencies. It is desirable also to build up systems of reserves or/and to follow well-planned, long-time debt policies that will smooth the ups and downs of National finance, as well as of economic conditions generally. Doubtless many of the payers of heavy income taxes will join with other interests in urging the substitution of sales and other taxes more to their liking. Probably come of those combinations will succeed in part when local and national situations are opportune. But it appears unlikely that the income tax will soon cease to be the major source of Federal revenue and also of increasing importance in State finance. It strikes its roots directly and deeply into the fountain source of all taxes -- income --; appeals to the general sense of fairness, and it has a growing popular support not accorded any other equally productive Federal tax. Its inherent qualities, its American record during the war and since, and its longer records in foreign countries, all indicate the role that the income tax is destined to play. The return of prosperity will restore its yields; proper amendments and supplementary measures can overcome some of the former faults of instability and insure its premier importance and permanence in the American system.

In Harmony With Ideals Of The Administrative. -- Moreover, a properly designed and administered income tax is peculiarly in harmony with the ideals and aims of the present administrations. It offsets the regressiveness of most other Federal and State taxes, which fall all too heavily on "the forgotten man." It does not cut down the purchasing power of those with small incomes, including those on relief, as do sales taxes and tariffs, which raise commodity prices. It does not check the development of new enterprise by taxes on sales or property before net earnings are made. It raises most of the taxes for ordinary and emergency purposes from the most prosperous businesses and the individuals who have the most ability and who profit most from the opportunities which society and governmental protection afford them. In normal times it can yield an abundance of revenues; if properly handled in prosperous times it can yield enough more to build up reserves for the future or to pay off debts of depression periods. Those large income taxes, contributed by industry in boom times to pay off debts and build up reserves, may serve at the same time to stabilize business in several ways; they may lessen taxes for debt service in future depression periods. They may check the overextension of plant and unbalanced production that would follow unduly large profits and surpluses, and they my help to build up industrial and government insurance reserves that may steady purchasing power and decrease tax drains for relief purposes in bad times. Of course, banking and other policies would have to be properly coordinated to carry out these fiscal policies with respect to reserves, credit, et cetera.

It must be admitted that income taxes have not been so designed and administered in the past as to fulfill all of their possibilities. There are serious problems of administration that will prevent entirely satisfactory results in the future. Nor is it claimed that all Federal revenue needs should be supplied by the income tax alone. Our present task, however, is to profit by past experience and to make all improvements that are practicable. The tax system must be considered as a whole but here and now we are concerned particularly with suggestion for improving the Federal income tax and its administration in such ways that it can play its proper role in the most effective and satisfactory way; in other words, so that the Federal Government can be of the most possible service to its citizens.

SECTION III ESTIMATES

Revising The Income Tax

III Estimates

What revisions of the income tax should be made to help it fulfill its role? Some revision should be made to remove certain inequities; others should provide for improved administration; still others should provide for some increase in revenue if they are needed to meet our extraordinary needs. How much more is necessary depends upon whether the country will be better off if it suffers the burdens of taxpaying or suffers the lack of services which the taxes would provide. We shall turn next to estimate of needs and of revenues to meet them. then, we shall consider methods by which income taxes may be increased if necessary, and still later to suggestions for removing certain inequities and for improving administration.

Let us consider our present and prospective National situation. Table 1 presents a confidential tentative Treasury estimate of receipts, expenditure, and debt status for the fiscal years 1935 to 1938. Table 2 presents a somewhat more detailed similar confidential estimate of revenues for the fiscal years 1935 and 1936. These estimate are based upon a continuance of the taxes authorized by the Revenue Act of 1934, plus the extension of temporary tax provisions capable of yielding about half a billion dollars a year. The "probable" "moderate" rate of recovery assumed, as represented by the Federal Reserve Board index of industrial production, is as, follows: calendar year 1935-84; 1936-92; 1937-95; 1938-98; 1939-105.

Table 3 gives staff /6/ estimates of income tax yields for normal, prosperity, and depression years, assuming the 1934 Act in effect.

With Table 1 E-43

CONFIDENTIAL

Not to be made public.

ROUGH ESTIMATES OF FEDERAL RECEIPTS AND EXPENDITURES, 1935-1938,
ACCORDING TO VARIOUS BASIC FORECASTS

August 23, 1934

There are attached for your confidential use rough approximations of Federal receipts and expenditures, fiscal years 1935-1938, inclusive, under three broad assumptions regarding business conditions, probable (moderate rate of recovery -- Federal Reserve Board index of industrial production: calendar year 1935-84, 1936 - 92, 1937 - 95, 1938 - 92, 1939 - 105); low (about 10 per cent below probable on the Federal Reserve Board index of industrial production): calendar year 1935-84, 1936 - 92, 1939 - 105); low (about 10 per cent below probable on the Federal Reserve Board index of industrial production); and high (about 10 per cent above probable on basis of Federal Reserve Board index of industrial production). Moderate (as contrasted with inflationary) changes in the price level are assumed.

The estimates of receipts are subject to as wide a range of error as the basic business forecasts on which they are based. Estimates of expenditures are merely guesses which take account of the probable broad effect of assumed business conditions on different major classes of Federal activities.


Susan S. Burr

Attach.

(Estimates on following page)


CONFIDENTIAL - Not to be made public.

Table 1. ROUGH ESTIMATES OF FEDERAL RECEIPTS AND EXPENDITURES, 1935-1938, ACCORDING TO VARIOUS BASIC FORECASTS (billions of dollars)

                General and special funds,
                    excluding A. A. A

            Receipts,
            assuming
            temporary            Expenditures,
            tax provisions       excluding debt         Deficit (-)
            extended (2)         retirement             Surplus (+)

1935            3.2                 8.1(5)                (-) 4.9
1936            3.7                 5.8                   (-) 2.1
1937            3.8                 4.3                   (-) 0.5
1938            4.0                 3.5                   (+) 0.5

1936            3.1                 6.8                   (-) 3.7
1937            3.3                 5.5                   (-) 2.2
1938            3.5                 4.6                   (-) 1.1

1936            4.1                 4.8                   (-) 0.7
1937            4.6                 3.7                   (+) 0.9
1938            4.9                 3.1                   (+) 1.8

                                 Receipts
                                 from extension         For
                                 of temporary           statutory
            Public debt          tax provisions         debt
            end of year          (2)                    retirement

                 ESTIMATES   --   PROBABLE

1935            31.9                 --                   0.6
1936            34.0                0.4                   0.6
1937            34.5                0.5                   0.6
1938            34.0                0.5                   0.7

                             --   LOW

1936            35.6                0.4                    --
1937            37.8                0.4                    --
1938            38.9                0.4                    --

                             --   HIGH

1936            32.6                0.5                    --
1937            31.7                0.5                    --
1938            29.9                0.5                    --

                Agri., Adjust. Adm. (4)

                                 Expenditures,
                                 general and
              Receipts           emergency

1935            0.6                 0.8
1936            0.2                 0.4
1937             --                 0.1
1938             --                  --

1936             --                 0.8
1937             --                 0.5
1938             --                 0.5

1936             --                 0.2
1937             --                  --
1938             --                  --

     (1) No account is taken of net trust fund items and of possible
change in General Fund balance.

     (2) Assumes temporary taxes extended (rates and exemptions as
amended by Revenue Act of 1934)

     (3) As provided by existing law.

     (4) Estimates under probable for 1935 and 1936 are those
submitted by A. A. A. as of July 31; no other estimates made of
receipts; expenditures guessed on basis of very broad assumptions.

     (5) On basis of latest estimates submitted by Departments,
estimated expenditures from funds not yet allocated, and estimated
requirements for which appropriations not yet made (Mr. Bell's July
31 estimate of monthly cash withdrawals-confidential). During 1934
the estimates of expenditures made by Departments ran considerably
below the actual expenditures.

TABLE 2. -- TENTATIVE REVENUE ESTIMATES, REVENUE ACT OF 1934 (In Millions of Dollars)


                                                   Fiscal Year 1935

                                                   Estimate of July
                                                        30, 1934

                                         Budget         As under
                                         Estimate       1932 act

Income taxes:

Corporation, current                       504.0          400.6

  Elimination consolidated
  returns (1934 act)

  Administration of
  depreciation (1934 act)

  Personal holding companies
  (1934 act)

Individual, current                        621.0          427.0

  Rate structure (1934 act)

  Capital gains and losses
  (1934 act)

  Partnerships (1934 act)

Back taxes                                 140.0          110.0

   Total income taxes                    1,265.0          937.6

Miscellaneous internal revenue:

  Continuing                               980.9        1,051.6

  Taxes terminated, 1934 act                55.7           53.1

Temporary taxes, terminating
June 30, 1935, under 1932 act

  Manufacturers' excise taxes              346.7          337.4

  Stamps, excluding playing cards           88.0           56.2

  Admissions, tel. & tel., oil              48.8           45.3
  by pipe line

    Total miscellaneous                  1,520.1        1,543.6
    internal revenue

Customs:

  Alcoholic Beverages                       84.0           33.3

  All other                                382.0          300.0

    Total                                  466.0          333.3

Total customs and internal               3,251.1        2,814.5
revenue (exclusive of
processing taxes)

                                             Fiscal Year 1935

                                          Estimate of July 30, 1934

                                         Effect of
                                         1934 act       Total

Income taxes:

Corporation, current                       504.0        400.6

Income taxes:

Corporation, current                  --      --        415.6(2)

  Elimination consolidated            --      --          --(2)
  returns (1934 act)

  Administration of                   --       +          15(3)
  depreciation (1934 act)

  Personal holding companies          --      --          --(2)
  (1934 act)

Individual, current                   --      --        437.0(2)

  Rate structure (1934 act)           --       +        17

  Capital gains and losses            --       -         7(4)
  (1934 act)

  Partnerships (1934 act)             --      --        --(2)

Back taxes                             +      80(5)     190.0

   Total income taxes                  +     105      1,042.6

Miscellaneous internal revenue:

  Continuing                           +      26.0    1,077.6

  Taxes terminated, 1934 act           -      28.9       24.2

Temporary taxes, terminating
June 30, 1935, under 1932 act

  Manufacturers' excise taxes          +       2.2      339.6

  Stamps, excluding playing cards      -       3.0       53.2

  Admissions, tel. & tel., oil        --        --       45.3
  by pipe line

    Total miscellaneous                -       3.7    1,539.9
    internal revenue

Customs:

  Alcoholic Beverages                 --        --       33.3

  All other                           --        --      300.0

    Total                             --        --      333.3

Total customs and internal             +     101.3    2,915.8
revenue (exclusive of
processing taxes)

                                           Fiscal Year 1936

                                          Assuming temporary
                                          taxes not extended

                                      Basis of          Effect of
                                      1932 act          1934 act

Income taxes:

Corporation, current                  428.0     --      --

  Elimination consolidated               --     --      --(2)
  returns (1934 act)

  Administration of                      --      +     30(3)
  depreciation (1934 act)

  Personal holding companies             --     --     --(2)
  (1934 act)

Individual, current                   560.0     --     --

  Rate structure (1934 act)              --      +     40

  Capital gains and losses               --      -     33(4)
  (1934 act)

  Partnerships (1934 act)                --      -     --(2)

Back taxes                            115.0      +     50(5)

   Total income taxes               1,103.0      +     87

Miscellaneous internal revenue:

  Continuing                        1,051.1      +    175.0

  Taxes terminated, 1934 act             --     --     --

Temporary taxes, terminating
June 30, 1935, under 1932 act

  Manufacturers' excise taxes            --     --     --

  Stamps, excluding playing cards        --     --     --

  Admissions, tel. & tel., oil           --     --     --
  by pipe line

    Total miscellaneous                  --     --     --
    internal revenue

Customs:

  Alcoholic Beverages                  27.5     --     27.5

  All other                           320.0     --    320.0

    Total                             347.5     --    347.5

Total customs and internal               --     --     --
revenue (exclusive of
processing taxes)

                                       Fiscal Year 1936

                                     Assuming
                                     temporary
                                     taxes not         Added if
                                     extended          temporary
                                                       taxes
                                     Total             extended (1)

Income taxes:

Corporation, current                  458.0(2)  --       --

  Elimination consolidated               --     --       --
  returns (1934 act)

  Administration of                      --     --       --
  depreciation (1934 act)

  Personal holding companies             --     --       --
  (1934 act)

Individual, current                   567.0(2)  --       --

  Rate structure (1934 act)              --     --       --

  Capital gains and losses               --     --       --
  (1934 act)

  Partnerships (1934 act)                --     --       --

Back taxes                            165.0     --       --

   Total income taxes               1,190.0     --       --

Miscellaneous internal revenue:

  Continuing                        1,226.1     --       --

  Taxes terminated, 1934 act             --     --       --

Temporary taxes, terminating
June 30, 1935, under 1932 act

  Manufacturers' excise taxes            --      +      358.1

  Stamps, excluding playing cards      27.4      +       44.2

  Admissions, tel. & tel., oil          2.0     --       46.3
  by pipe line

    Total miscellaneous             1,255.5      +      448.6
    internal revenue

Customs:

  Alcoholic Beverages                  27.5     --       --

  All other                           320.0     --       --

    Total                             347.5     --       --

Total customs and internal          2,793.0      +      448.6
revenue (exclusive of
processing taxes)

                                       Fiscal Year 1936

                                     Total 1932 act 1934
                                   additions and temporary
                                     taxes extended (1)

Income taxes:

Corporation, current                         458.0

  Elimination consolidated                      --
  returns (1934 act)

  Administration of                             --
  depreciation (1934 act)

  Personal holding companies                    --
  (1934 act)

Individual, current                          567.0

  Rate structure (1934 act)                     --

  Capital gains and losses                      --
  (1934 act)

  Partnerships (1934 act)                       --

Back taxes                                   165.0

   Total income taxes                      1,190.0

Miscellaneous internal revenue:

  Continuing                               1,226.1

  Taxes terminated, 1934 act                    --

Temporary taxes, terminating
June 30, 1935, under 1932 act

  Manufacturers' excise taxes                358.1

  Stamps, excluding playing cards             71.6

  Admissions, tel. & tel., oil                48.3
  by pipe line

    Total miscellaneous                    1,704.1
    internal revenue

Customs:

  Alcoholic Beverages                         27.5

  All other                                  320.0

    Total                                    347.5

Total customs and internal                 3,241.6
revenue (exclusive of
processing taxes)

     (1) Assumes temporary taxes extended (rates and exemptions as
amended by Revenue Act of 1934) except when specifically terminated
by Revenue Act of 1934.

     (2) These estimates take no account of certain changes in the
Revenue Act of 1934 for which additional revenue might be as follow
for the fiscal years 1935 and 1936 (highly conjectural):
corporation, current -- elimination of consolidated returns 10M and
20M; personal holding companies, 8M and 13M; exchanges and
reorganizations, 3M and 7M: individual, current -- partnerships, 3M
and 5M.

     (3) Administration procedure adopted as substitute for change
in law: 15M current, 35M back in 1935, and 30M current and 20M back
in 1936.

     (4) Largely conjectural.

     (5) Includes 35M for administration of depreciation, and 45M
for Bureau drive in 1935; and 20M and 30M, respectively, for 1936.

Table 3. Estimates of Probable Revenue from the Federal Income Tax under the Revenue Act of 1934 /1/


                                                       Individuals
Year (a)            Individuals     Corporations            and
                         (b)             (c)           Corporations

"Normal" year      $1,862,639,551  $1,360,989,332    $3,223,628,883

"Prosperous" year   2,831,013,357   1,449,062,820     4,280,076,177

"Depression" year     863,127,654     531,870,587     1,394,998,241

"Depression" year     594,601,270     345,174,353       939,775,623

(a) For the "normal" year computations, incomes reported in 1926
    were taken as a basis; for the "prosperous" year, those in
    1928 were taken for the first "depression" year, those in 1931;
    for the next "depression" year, those in 1932.

(b) These estimates were made on the basis of averages per return
    within each income class and are therefore somewhat high because
    the method did not permit of any allowance for the skewness of
    the distribution of the income within each income class.

(c) These estimates are in the nature of a minimum because no
    allowance was made for the change in the method of carrying
    forward losses as between the Revenue Act of 1934 and the
    preceding Revenue Acts.

  
FOOTNOTE TO TABLE
 
/1/ Estimates by Shere and Koller.

Factory Of Safety For Errors And Emergencies. -- If the estimates presented in Table 1, 2, and 3 are reasonably accurate, particularly if gradual, substantial, and sustained recovery can be counted on, the present rates of taxation should yield adequate revenues over the next few years. True, certain adjustments should be made and revenues must be found as substitutes for such of the temporary taxes as are not continued. Moreover, plans should be made for an additional half-billion as a measure of safety and particularly as a support for National credit in case of emergency.

If wise tax and debt policies are followed, it would appear that the United States could safely incur a total debt of 35 billions, perhaps even more if necessary. Unusual Treasury funds on hand, unprecedented potential bank and other credit, and the resources of the country should make possible the flotation and service of such a debt, certainly if public credit is supported by courageous taxation and if refunding and general debt policy is managed with skill.

In certain respects such management is the key to the whole situation. Proper tax and debt policy should make refunding possible at around 3 per cent. Some authorities think it could be done at 2 1/2 per cent, among them, Mr. John Maynard Keynes, who says:

"Continuous pressure should be exerted by the Treasury and the Federal Reserve System to bring down the long-term rate of interest. For it assuredly lies in their power, and it is a mistake to suppose that, because the government will be a large borrower, interest rates will rise -- inasmuch as the Treasury's resources in gold and the Reserve System's excess reserves put the market wholly in their hands. If, a year hence, the administration cannot borrow for twenty years below 2 1/2 per cent, the Treasury will have muddled its task, which its performance up to date gives one no reason to expect." /7/

For the eleven years 1919-1930 the Federal debt service, interest, and amortization of principal, averaged about $1,800,000,000 annually. This reduction in debt was considerably above sinking fund requirements, but it indicates what can be done in prosperous years. With the interest rate at 3 per cent a debt of $30,000,000,000 could be amortized in 35 years with annual payments of $1,396,180,200; a debt of $40,000,000,000, with payments of $1,861,573,600. With semi-annual payments, which is the usual practice, the total annual requirements are several million less. The annual debt service requirements would, of course, vary with rates of interest and number of years the bonds run. Revenue requirements to meet debt service are indicated in Table 5 and 6. The annual charge to amortize a debt of $30 billion in 35 years would not make the debt service unreasonably excessive in view of actual experience in debt redemption in the post-year decade. (See Table 4).


Table 4. Federal Debt Service, 1919-1930.

Total interest paid on Federal debt       =      $9,577,130,144 /a/
1920-1930, both inclusive

Average annual interest on debt           =             870,648,195

Maximum amount of Federal debt,           =      26,594,000,000 /a/
August 31, 1919

Minimum debt in post-war period,          =      16,185,310,000 /c/
June 30, 1930

Decrease in debt, 1919-1930               =         $10,408,690,000

Average annual debt retirement            =             946,244,545

Summary:

Average annual debt retirement            =             946,244,545
Average annual interest on debt           =             870,648,195
Average annual debt service               =          $1,816,892,740
FOOTNOTES TO TABLE
 
/a/ See the Annual Report of the Secretary of the Treasury for1933, p. 310.

/b/ Statistical Abstract of the United States, 1933, p. 193.

/c/ Annual Report of the Secretary of the Treasury for 1933, p.360.

Table 5. -- Annual Debt Service Required To Amortize Debt Of $30 Billion


                              Interest Rates

Term
(Yrs.)          2 1/3%                2 3/4%               3%

15         $2,422,986,600       $2,467,778,400       $2,513,001,600
20          1,924,408,800        1,970,155,800        2,016,474,000
25          1,628,274,900        1,675,202,700        1,722,838,800
30          1,433,326,500        1,481,535,000        1,530,580,200
35          1,296,164,700        1,345,695,600        1,396,180,200
40          1,195,084,800        1,245,947,700        1,297,872,600
45          1,118,023,200        1,170,209,100        1,223,556,600
50          1,057,740,000        1,111,229,400        1,165,965,600

Term
(Yrs.)        3 1/4%               3 1/3%

15         $2,558,650,800       $2,604,850,200
20          2,063,362,500        2,110,837,500
25          1,771,176,000        1,820,225,400
30          1,580,449,200        1,631,143,200
35          1,447,602,300        1,499,952,900
40          1,350,835,800        1,404,820,800
45          1,278,031,200        1,333,605,000
50          1,221,907,200        1,279,012,500

Table 6. Annual Debt Service Required To Amortize Debt Of $40 Billion


                                Interest Rates

Term
(Yrs.)          2 1/2%              2 3/4%                3%

15          $3,230,648,800       $3,290,371,200      $3,350,668,800
20           2,665,878,400        2,626,874,400       2,688,632,000
25           2,171,033,200        2,233,603,600       2,297,118,400
30           1,911,102,000        1,975,380,000       2,040,773,600
35           1,728,219,600        1,794,260,800       1,861,573,600
40           1,593,443,400        1,661,263,600       1,730,496,800
45           1,490,697,600        1,560,278,800       1,631,408,800
50           1,410,320,000        1,481,639,200       1,554,620,800

Term
(Yrs.)         3 1/4%               3 1/2%

15          $3,411,534,400       $3,473,133,600
20           2,751,150,000        2,814,450,000
25           2,361,568,000        2,426,967,200
30           2,107,265,600        2,174,857,600
35           1,960,136,400        1,999,937,200
40           1,801,114,400        1,873,094,400
45           1,704,041,600        1,778,140,000
50           1,629,209,600        1,705,350,000

     If, instead of annual payments, semi-annual payments were made
-- to amortize $40 billion in 35 years -- assuming an interest rate
of 2 1/2% -- the semi-annual payments required would be
$860,779,200; assuming an interest rate of 3% -- the semi-annual
payments required would be $926,897,600; assuming an interest rate
of 3 1/2% -- the semi-annual payments required would be
$995,573,200. If the $40 billion debt were to be amortized in 15
years at an interest rate of 3% the semi-annual payments required
would be $1,665,577,200.

It is evident that a tax policy such as recommended would not only directly lessen deficits and the total of necessary borrowing but it would also make possible a credit policy and a borrowing rate that would further lessen debt charges and otherwise promote general confidence and economic recovery.

The estimates in Tables 1 and 2 are, of course, necessarily highly conjectural, both as to receipts and expenditures and consequently as to deficits and debt increases. Because of this fact, because of the temporary taxes, and because of the crucial importance of supporting a wise credit policy as suggested above, it appears desirable to consider possibilities of increasing revenues by half a billion annually -- possibly by more, if expenditures must be increased substantially above the estimates -- in order to be prepared for the contingency that recovery may not come up to expectations.

In this way we may hope to bring the budget into balance in 1937, though possibly not before 1938. This would be eight or nine years after the beginning of the depression and five or six years after the beginning of the upturn, long enough, it would seem, to be nearing "normal" conditions when budgets certainly should be in approximate balance.

When considering the future Government requirements and long-time tax policy, it is well to keep in mind at all times the probable influences of changing price levels as well as the effects of Government regulation and other important factors affecting prices and incomes. /8/ Even moderate inflation -- as opposed to will inflation -- such as may come about with our new monetary provisions and our greatly increased credit potentialities, may bring about disproportionately large increases in incomes during economic revival. This is true both of ordinary income and also of capital gains. Even though much of the gain is fictitious in the sense that it is in terms of money rather than in real purchasing power, it will have great effect upon income and other tax receipts in dollars used to pay debts in dollars.

On the other hand, if, as some suggest, the N.R.A. increases costs more than selling prices, and if it diverts business profits into wages of those who pay little or no income tax, it may work in the opposite direction from that due to rising prices mentioned above, though ultimately and indirectly the net result may be otherwise. The N.R.A. illustration is merely suggestive of numerous other forces conditioning tax policy.

It would be unwise, however, to count too much on rising price levels to pull us out of our present deficits and pay off our debts. Such policies have led to disaster in the past and might well do so in the future. The outstanding lesson of financial history is that in emergencies public credit will not maintained unless it is upheld by a more rigorous tax policy than is popular during the emergency.

 
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