Volume 499, February 20 – February 21, 1942

DIARY Book 499 February 20 and 21, 1942 Regraded Unclassified ( Book Page Airplanes Shipments to British Forces - Kamarck report - 2/20/42 499 323 American Federation of Labor See Speeches by HMJr Appointments and Resignations Morris, Dave. Jr. : Exchange of letters on leaving for the Army - 2/20/42 217 - B - Barth, Alan Editorial Opinion on the War: The Basic Cleavage - 2/20/42 290 Belgium See Foreign Funds Control: Sofina Brazil See Latin America British Purchasing Mission Federal Reserve Bank of New York statement showing dollar disbursements, week ending February 11, 1942. 327 - C - China Loan: Draft agreement discussed by representatives of Treasury and State, together with Fox and Currie - 2/20/42 201 a) Draft agreement 202 b) Re-draft - 2/21/42 420 Ambassador Gauss's recommendations concerning loan - - 2/21/42, 425 Chinese students in United States - financial aid to - - 2/20/42 336 Churchill, Winston HMJr asks for autographed picture - 2/20/42 321 Correspondence Mrs. Forbush's resume' - 2/20/42 268 - D - Defense Savings Bonds See Financing, Government Deferments, Military Secret Service: Gaston recommendations concerning White House detail - 2/20/42 312 Dows, Olin See Financing, Government: Defense Savings Bonds Regraded Unclassified - I - Book Page Exchange Market Resume's - 2/20-21/42. 499 357,448 - F - Financing, Government Defense Savings Bonds: See also Speeches by HMJr - American Federation of Labor purchase of $1 billion Monroe, Lucy: Thanked for offer of participation - 2/20/42 219 Dows, (01in) and Mrs. HMJr to advise on future art work - 2/20/42 220 a) Sloan-HMJr conversation on Dows' appointment - 2/24/42: See Book 500, page 191 b) Delay recommended in view of Melvyn Douglas publicity - 2/25/42: Book 501, page 60 Progress report - - 2/20/42 230 Payroll Savings Plan: Firms employing 500 persons or more - report on 240 Series E Savings Bonds: Daily changes in stock on hand - 2/20/42 242 Foreign Funds Control Belgium: Sofina (Societe financibre de transports et d'entreprises industrielles): HMJr and Nelson Rockefeller discuss - 2/21/42 378 Wenner-Gren, Axel: Wega, S. A. - American Embassy, Mexico City, message concerning organization - 2/20/42 354 - G - General Counsel, Office of Congressional Record digest as affecting Treasury - 2/20/42 249 Gold "Bullets" (payments to soldiers partly in gold): Treasury--Mrs. FDR correspondence concerning - 2/20/42. 316 Vatican: Further purchases discussed by National City Bank of New York and Federal Reserve Bank of New York - 2/20/42 356 (See also Book 501, page 457 - 2/26/42; Book 504, pages 236 and 237 - 3/5/42) - L - Latin America Status of loans and Stabilization Fund explained to Senator Burton (Ohio) - 2/20/42 350 Brazil: Current position - White memorandum - 2/20/42 351 Regraded Unclassified - = - Book Page xciange Market Resume's - 2/20-21/42. 499 357,448 So, 1 . inincing, Government Defense Savings Bonds: See also Speeches by HMJr - American Federation of Labor purchase of $1 billion Monroe, Lucy: Thanked for offer of participation - 2/20/42. 219 Dows, (Olin) and Mrs. HMJr to advise on future art work - 2/20/42 220 a) Sloan-HMJr conversation on Dows' appointment - 2/24/42: See Book 500, page 191 b) Delay recommended in view of Malvyn Douglas publicity - 2/25/42: Book 501, page 60 Progress report - 2/20/42 230 Payroll Savings Plan: Firms employing 500 persons or more - report on 240 Series E Savings Bonds: Daily changes in stock on hand - 2/20/42 242 orgign Funds Control Belgium: Sofina (Societé financière de transports et d'entreprises industrielles): HMJr and Nelson Rockefeller discuss - 2/21/42 378 Venner-Gren, Axel: Wega, S. A. - American Embassy, Mexico City, message concerning organization - 2/20/42 354 - G - eneral Counsel, Office of Congressional Record digest as affecting Treasury - 2/20/42 249 oll "Bullets" (payments to soldiers partly in gold): Treasury--Mrs. FDR correspondence concerning - 2/20/42 316 Vatican: Further purchases discussed by National City Bank of New York and Federal Reserve Bank of New York - 2/20/42 356 (See also Book 501, page 457 - 2/26/42; Book 504, pages 236 and 237 - 3/5/42) - L - atin America Status of loans and Stabilization Fund explained to Senator Burton (Ohio) - 2/20/42 350 Brazil: Current position - White memorandum - 2/20/42 351 Regraded Unclassified - L - (Continued) Book Page Lehmann, Lotte Canadian trip discussed by HAJr and Acheson - 2/21/42. 499 398 Lend-Lease U.S.S.R.: Shipmente - Swope report - 2/20/42 245,416 (See also Book 500, pages 71 and 73) a) Delivery of all orders by April 1: HMJr's memorandum to Swope - 2/24/42: Book 500, page 258 b) Mack's further memorandum: Book 500, page 259, and Book 501, page 452 c) HMJr's note to Stettinius on delay in requisitions reaching Treasury - 2/24/42: Book 500, page 261 d) Stettinius' answer - 2/25/42: Book 501, page 190 e) Nelson-HMJr correspondence - 3/4/42: Book 504. page 50 f) McCahe (Deputy Administrator)-HMJr correspondence - 3/4/42: Book 504, page 52 g) Mack memorandum on "Russian Protocol items" - 3/5/42: Book 504, page 182 1) Nelson informed and copy of letter taken to Cabinet - 3/6/42: Book 505, page 2 2) Nelson-HMJr conversation about pressure on Nelson - 3/6/42: Book 505, page 5 A) Conversation repeated to Mack: Book 505, page 12 h) Mack memorandum (additional) - 3/6/42: Book 505, page 32 1) Nelson memorandum (further)-Book 505, page 36, 3/6/42--supported by 1) Report of Iron and Steel Branch: Book 505, page 37 2) Tabulation covering 11 items other than steel: Book 505, page 86 3) Procurement Division (Mack) comment - 3/9/42: Book 506, page 132 (See also Book 507, pages 15 and 18) 3) Conference with Gromyko - 3/6/42: Book 505, page 89 Operating report for week ending February 21, 1942 418 - И - Melia, Joseph Editorial Comment on the Home Front: Economies and Taxes - 2/20/42 296 Military Reports Reports from London transmitted by Hallfex and Campbell - 2/20-21/42 357-A,449 British Home Intelligence report for week ending February 16, 1942 - 2/21/42 454 Monroe, Lucy See Financing, Government: Defense Savings Bonde Regraded Unclassified - - M - - (Continued) Book Page Morgenthau, Henry, III Draft Status: Postal cards answered - 2/21/42 499 402 (See also Book 501, page 116 - 2/25/42) Morris, Dave, Jr. See Appointments and Resignations - N - Netherlands See Westchester Apartments - P - Philippine Islands Silver pesos - report on contents of Treasury vaults - 2/20/42 355 Plant Expansion Reconversion from war production to peace-time production, and War Department reaction against, discussed in Sullivan memorandum - 2/21/42 415 Post-War Planning British press reactions on problems - Hoflich memorandum - 2/20/42 349 - R - - Revenue Revision 1942 Revenue Bill: Conference; present: HMJr, Sullivan, Paul, Tarleau, and Blough - 2/20/42 10 a) Paul describes conference with Doughton, George, and Stam; discussion of 1) $1 billion corporate tax program 2) Individual tax program, particularly withholding at source 3) Sales tax and excise taxes a) HMJr asks for study on amounts paid by single person earning $750 and couple earning $1500 - 2/26/42: Book 501, page 234 4) Loopholes, especially tax-exempts and joint returns Tentative Treasury program as of February 20, 1942.. 53 - S - Secret Service See Deferments, Military Sofina (Societe financière de transports et d'entreprises industrielles) See Foreign Funds Control: Belgium - S - (Continued) Book Page Speeches by HMJr Defense Savings Bonds American Federation of Labor thanked for participation: Draft 1 - 2/20/42 499 222 a 2 - 2/21/42. 359 # 3 - - 2/21/42 369 Reading copy - 2/22/42: See Book 500, page 1 1) Guests: Book 500, page 11 2) Pledge to buy $1 billion in Defense Bonds: Book 500, page 16 3) Set of recordings sent to William Green - - 2/27/42: Book 502, page 124 - T - - Taxation See Revenue Revision - U - - U.S.S.R. See Lend-Lease - V = Vatican See Gold - W - War Department See Plant Expansion Wenner-Gren, Axel See Foreign Funds Control Westchester Apartments Ownership explained to FDR - 2/20/42 335 Regraded Unclassified 1 February 20, 1942 10:23 a.m. HMJr: Hello. Mrs. Brady: Mr. Secretary. HMJr: Yes. B: Is there something I can do for you? HMJr: I think there 1s. Is Grace coming in this morning? B: Oh, she's in; but she's over at the house right now. HMJr: Well, I wonder if you could get this message, because I'd like to get a clearance if possible. B: Uh huh. HMJr: Before lunch. B: Uh huh. HMJr: Have you got a pencil? B: Yes, sir. HMJr: I've asked Mr. Sumner Pike B: Yes. HMJr: of SEC B: Uh huh. HMJr: whether he would take charge of the - and run - the Aniline Dye Corporation for me. B: Uh huh. HMJr: Hello. He'd like to do it very much. B: Uh huh. HMJr: But before resigning from the SEC to do this, Regraded Unclassified 2 - 2 - he'd just like to know that it meets with the President's approval. B: Uh huh. All right. HMJr: He'd like to do it very much, and I'm very anxious to have him do it. B: All right. Well, I'll get an answer for you 8.8 soon as I can. HMJr: Would you, please? B: Yes, sir. HMJr: Thank you. 3 February 20, 1942 10:40 a.m. HMJr: Hello. William C. Bullitt: Hello. HMJr: Bill. B: Hello, Henry. HMJr: How are you? B: Fine, how are you? HMJr: I read your letter yesterday. B: Yeah. HMJr: And I just wanted to compliment you on it. B: (Laughs) You approved of it, did you? HMJr: Well, I - you know where I stood when you asked me originally. B: Yes. HMJr: And I'm very glad you did it at this time for everybody who's involved. B: Well, that's fine, Henry. I'm delighted. HMJr: Because it was a good letter, and it helped us in what we're trying to do. B: Well, what I thought was that I'd try to devise one that wasn't going to hurt anybody's feelings and wasn't going to look as if there was any- thing more in it than met the eye. HMJr: Right. Now, the funny thing is, you know, we suggested that they release the letter. B: Yes. HMJr: And Mack has not yet released it. - 2 - B: Well, now, I'll tell you. I was called up yesterday by, I think his name is Williamson, I've never met him. HMJr: Yeah. B: And he said to me that you had made that sug- gestion to do that, and did I have any objection to it being released; and I said certainly I had no objection to the thing being released at once. HMJr: Yeah. Well, I think we'll get them to release it today because I think for your sake, it should be released. B: Yeah. HMJr: And the sooner the better. B: Yeah. HMJr: For your sake. B: Well, there we are. Henry. HMJr: Yes. B: Are you going to be in town over the week-end? HMJr: Yes. B: I'd love to sit down with you for a few minutes. HMJr: Well, will you give me a ring? B: You bet. HMJr: Righto. I'd like to see you. B: Righto. Good-bye. I'll let you know then. HMJr: Thank you. B: Good-bye. Regraded Unclassified 5 February 20, 1942 10:44 a.m. Francis Biddle: Hello, Henry. HMJr: I just wanted to tell you that my wife, who has lots more horse sense than I have, says I should go to that dinner Monday night. B: (Laughs) Well. HMJr: She says she thinks it's a mistake. B: Well, I'll probably hear from Ed. Did you hear from Ed again? HMJr: No, I haven't. B: Yeah. HMJr: But I thought I would send word to them that I'll be glad to go and sit wherever he wants to put me. B: Is Mrs. Morgenthau going, too? HMJr: Yeah. B: I see. HMJr: Yeah. B: Well, I'll consider it; but I don't want to if I can help it. HMJr: Well, I wanted to tell you. I found that she'd already accepted. B: Oh, I see. HMJr: But she thinks that I should go B: All right, Henry. Thank you. HMJr: Thank you. 5 February 20, 1942 10:44 a.m. Francis Biddle: Hello, Henry. HMJr: I just wanted to tell you that my wife, who has lots more horse sense than I have, says I should go to that dinner Monday night. B: (Laughs) Well. HMJr: She says she thinks it's a mistake. B: Well, I'll probably hear from Ed. Did you hear from Ed again? HMJr: No, I haven't. B: Yeah. HMJr: But I thought I would send word to them that I'll be glad to go and sit wherever he wants to put me. B: Is Mrs. Morgenthau going, too? HMJr: Yeah. B: I see. HMJr: Yeah. B: Well, I'll consider it; but I don't want to if I can help it. HMJr: Well, I wanted to tell you. I found that she'd already accepted. B: Oh, I see. HMJr: But she thinks that I should go B: All right, Henry. Thank you. HMJr: Thank you. Regraded Unclassified Pages 6-9: See pages 357A-D 10 February 20, 1942 10:45 a.m. TAXES Present: Mr. Tarleau Mr. Blough Mr. Paul Mr. Sullivan H.M.JR: Before we go in on our own, somebody give me a little thumbnail sketch of last night. MR. PAUL: Well, we - Mr. Doughton and Senator George and John Sullivan and I and Stam were there. We discussed four points. We first discussed the \ corporate tax problem. We put up to them very ten- tatively 8 new scheme which we evolved yesterday to get verbally around the emotional objection they have to 8. reduction of the credit from ninty-five to seventy- five percent. Stam had provisionally indicated his acceptance of that in the afternoon. George took quite to it. I don't know how much Doughton understood it from the conversation last night. MR. SULLIVAN: He didn't. MR. PAUL: But he didn't indicate anything. George cottoned right to it. George indicated that - one thing that I thought showed good development, that he wasn't against the billion dollar corporate tax program. In fact, he said that if you are going to raise nine billion, about a third of it has to come from the corporations. Then we went on to discuss the individual to program. We didn't discuss any specific rates, but the principal item we discussed there was witholding at the source. The principal thing we discussed in connection with individual taxes 1103 the control of inflation and necessity plus the withholding mechanism. I think Doughton had some doubts about the witholding but he centered mostly on whether it was practical and Regraded Unclassified 11 - 2 - and we assured him that our scheme was, and he seemed to accept that pretty well. George accepted it more than he. 3 Then we discussed sales taxes. H.M.JR: You don't agree? MR. SULLIVAN: No, I don't. He feels just exactly the way they felt up there after that first meeting, that you couldn't withhold from the wage earner because you weren't withholding except on a three months basis on the provisional fellow and the pro- visional employer. He didn't feel that way, Randolph. MR. PAUL: I thought he did when we said we were going to have the employer withhold from himself every three months. MR. SULLIVAN: No. The reason I know this, Randolph, is that he has talked with me about this over the phone and other times within the last month, several times. MR. PAUL: Well, he talked privately to you while I was talking to George for a while so it might be that he said something then, but I am inclined to disagree with you. I don't think we are going to have any trouble any way. MR. SULLIVAN: I think we are going to have trouble but I think we can win. I think it is the most important part of the whole program. MR. PAUL: Then we discussed sales taxes and there isn't any doubt that we are going to have some trouble. I don't think Mr. Doughton or Mr. George are very strong for them but they recognize that there is a strong press- ure on the Hill and they indicated that in their opinion a reduction of the exemptions, about which we asked their opinion, would be something in the nature of analternative to sales taxes. We discussed excises to some extent. The general reaction - some of them were all right. We indicated some of them we were thinking of. For in- stance, increased tax on beer is all right with me. 12 - 3 - Some of them Doughton objected to and the general feeling about excise taxes, well, if you have got to have them, why not have a sales tax, and I don't think we made too much progress on that point. is We finally - - I had better say we discussed loop-holes. The principal one under discussion - two under dis- cussion being tax-exempts and they said we wouldn't possibly get that through their committees. Second, joint returns and there Doughton brought back the whole conversation-- MR. SULLIVAN: He really got warmed up then. MR. PAUL: He got warmed up at that point. H.M.JR: Which way is he? MR. SULLIVAN: Anti-President, anti-Rayburn, anti-McCormack. MR. PAUL: He doesn't want the earned income exemption from the individual tax. ne indicated, for instance, that by God he wasn't going to have any sales taxes until they closed that loop-hole. MR. SULLIVAN: He wasn't going to have any taxes, Mr. Secretary. MR. PAUL: Any taxes, but particularly he said sales. H.M.JR: Did he get personal on it? MR. SULLIVAN: As far as the President and Ray- burn and McCormack? You bet your life! MR. PAUL: He got personal as far as the Secretary was concerned. He said he appreciated his being on his side of it. MR. SULLIVAN: That was on economy, Randolph. That was the second time he has pulled that. Regraded Unclassified 13 - 4 - MR. PAUL: He or George said that. He brought in economy at the end, yes, and George then said, "Well, I guess, Mr. Doughton, we have to get a little economical up on the hill, too." MR. SULLIVAN: "Oh, we can't do that unless they take that--" They can't pass the buck to us. H.M.JR: I am sick and tired of hearing that. MR. SULLIVAN: Yes, I know. H.M.JR: I mean, your telling it to me. I'm not sick of your telling it to me, I mean what the Hill tells me. MR. SULLIVAN: I know. MR. PAUL: Finally, we discussed the matter of when we would come up there and it was tentatively arranged subject to your plans that we are to let them know Tuesday. H.M.JR: Tuesday? MR. PAUL: Next week. H.M.JR: Do they want me Tuesday? MR. PAUL: No, they want you the following Tuesday, if that is convenient to you and we are to let them know next Tuesday whether it is. H.M.JR: Who? MR. PAUL: Doughton. MR. SULLIVAN: The reason why we don't let them know until next Tuesday is that Doughton left this morning and won't be back until Monday night. 14 - 5 - MR. PAUL: I think it is March 3rd. H.M.JR: This is the twentieth. We have one more week in this month. I didn't realize. MR. PAUL: Isn't that Tuesday March 3rd, or is it the second? H.M.JR: Tuesday is the third. MR. PAUL: Well, that is the day then. H.M.JR: Well, I can tell them right now. MR. PAUL: Well, you can't tell Mr. Doughton. He is away. He went down home for the week end. H.M.JR: I see. That is swell. I thought you meant this next Tuesday. MR. PAUL: We offered to go this next week but Doughton-- MR. SULLIVAN: You looked pretty good when he said, "No, we couldn't." MR. PAUL: Well, we made the offer didn't we? MR. SULLIVAN: We certainly made the offer. H.M.JR: Is that the highlights? MR. PAUL: That is right. MR. SULLIVAN: That is right. H.M.JR: Let's do it this way. Let's start with the thing that bothers me the most first. That is the advantage of being the boss. I can pick the order in which we will take things up. That is, this question, I can go around and ask where each of you Regraded Unclassified 15 - 6 - stand and then where the people on the Hill stand. I am talking about lowering the exemptions. MR. PAUL: We brought that up specifically last night to get their reaction. H.M.JR: Let's just-- MR. PAUL: John can tell what he thinks about it. MR. SULLIVAN: 1 am opposed to it, sir. We are now down to the point where an individual, a single individual earning fourteen dollars and forty-five cents pays an income tax. There is no point of re- ducing it unless you reduce it down at least to six hundred from seven hundred fifty. There is no point to it unless you go down at least & hundred and fifty dollars. If you do that, that will mean that the person who earns eleven dollars and sixty cents a week will be paying an income tax. Now, there are many areas in the country where a person earning that money can support himself. There are other areas in which he can't possibly do that and he will have to be getting supplementary help from the state or the county and I think for us to levy an income tax on a person who must receive help or charity is a rather absurd situation. Now, some people, and I think Roy is one of them, feel that this is bad but it is worth while if it helps us beat a sales tax. I don t feel that way about it. I think that there is a Very dangerous threat of a sales tax but I don't think it is up to us to beat it with something we think is bad, but not quite as bad as the sales tax. I think it is up to us to try to beat both of them. That is my position. H.M.JR: That is clear. MR. PAUL: Let's hear from Roy. H.M.JR: Let's hear from Roy. Did you get that thing I sent you. Regraded Unclassified 16 MR. BLOUGH: Yes. On the basis of the pure equity involved, I wouldn't want to see this exemption lowered. H.M.JR: Should Tarleau be in on this? MR. SULLIVAN: 1 think 80. MR. PAUL: I would like to have him in. In fact, I cussion. think Tarleau ought to be in almost every tax dis- MR. SULLIVAN: So do I. MR. PAUL: If not all staff discussions. H.M.JR: Go ahead, Roy. MR. PAUL: Her loses a certain amount of familiarity with your point of view. He just gets a derivative. MR. BLOUGH: So far as the equity of the de- duction is concerned, I agree with Mr. Sullivan. On the other hadn, the situation at the present time is an extremely unusual one and I feel that because of the threat of infliction on the one hand, because of the feeling of the rest of the population that more people ought to be paying direct taxes, because event with a reduction in personal exemptions to six hundred and twelve hundred we won't have half the population of the United States paying income taxes, and because I think that this helps to meet the general public sentiment which is back of the sales tax, I am in favor of having the personal exemptions lowered, but only to be accompanied by some tax savings at the bottom 80 that part of this-- H.M.JR: Tax savings? MR. BLOUGH: Well, some people call it com- pulsory savings which I prefer to call tax savings accounts or something like that like that. MR. PAUL: Or bonds. 17 - 8 - MR. BLOUGH: Or bonds, which would be given to the people at the very bottom and available to them after the war. H.M.JR: Sir Frederick Phillips gave me this yesterday, what Donald Duck would pay in England. We have all been wrong so far. "Personal allowance, three hundred two dollars. Ten percent earned in- come allowance, two hundred fifty. Three dependent children, six hundred. Total allowance, one thousand one hundred seven. Taxable income, one thousand three hundred thirty. The first six hundred sixty dollars of taxable income on six showings equals two hundred fourteen dollars. The remaining six hundred seventy of taxable income is three hundred seventy-five. Income payable, five hundred forty- nine dollars and fifty cents.' (Mr. Tarleau entered the conference.) H.M.JR: That is Donald Duck's income in England. He would pay five hundred forty-nine dollars and fifteen cents. MR. PAUL: Against thirteen. MR. BLOUGH: Of course, there are more things to be added to the thirteen but even so, it is nothing like that. H.M.JR: But you are for lowering it? Mr. Sullivan is for not lowering it and Mr. Blough is for lowering it and I wondered where you (Tarleau) stood. MR. TARLEAU: Well, reludantly, I am for lower- ing it, yes. H.M.JR: And you? Regraded Unclassified 18 MR. PAUL: I am. I have changed my position and I want to add--I can't add anything on the point - on the merits to what Roy has said, but I do want to say two things. I have discussed this question with Hetzel. You were there one day and yesterday I ran into him over at the Washington at lunch hour. I said, "Now tell me what you really think about this." He said, "Well, if it will help beat the sales tax we won't kick about it. We may make a little nominal kick. Now, another thing that ought to be borne in mind is George's attitude which he displayed last night. He has 8. fear - he might be wrong, but he expressed it - that after the war there are going to be so many bonds, if we don't do something about it, in the hands of the wealthier classes that there is going to be & strong political pressure toward simply ignoring the liability and therefore he expressed a view that we ought to have some scheme for getting bonds into the hands of the widespread public. H.M.JR: What the hell does he think we are doing now? MR. SULLIVAN: That is what I told him, about the payroll deduction. MR. PAUL: We told him about that and he was very pleased, but this would be an additional expedient to that end. MR. SULLIVAN: He mentioned that before he knew. what we were doing on payroll deductions, Randolph. MR. PAUL: I know, and you called that to his attention, but all I am saying, John, is this, that if you have a reduction of the exemption coupled with the distribution of bonds to cover the tax representing the reduction, then you do spread bonds more than other- wise among the public. MR. SULLIVAN: No doubt. Regraded Unclassified 19 - 10 - MR. PAUL: So I wanted to mention that point. I am sure that aspect of it will be popular with George. MR. SULLIVAN: I would just like to add one thing, Mr. Secretary, to this discussion. H.M.JR: Please. MR. SULLIVAN: It was perfectly apparent to me last night that lowering exemptions is not going to defeat the sales tax. You recall, Randolph, that Senator George said, "We are going to have one group that is very strong for lowering exemptions, and we are going to have another group that is very strong for lowering the sales tax. My suspicion is that If we can't hold this thing we are going to get both, which I think would be very very bad. H.M.JR: Now, could you (Blough) give me verbally a summary of the thing that Hetzel sent me this morning? MR. BLOUGH: Yes. H.M.JR: What does it say? MR. BLOUGH: The summary, verbally, is this, that they made an examination of their affiliated unions in sixteen industries and about fifty three towns and nine states. In other words, it is a sample. They found that their membership had had about a fifteen percent increase in income between November, '41, and November '40, or about twenty-two dollars increase in their income. H.M.JR: Twenty-two dollars per week? MR. BLOUGH: Per month. These were fairly pros- perous families; a hundred and seventy-three dollars & month was the average. They have had an increase of twenty-two dollars in a year per month. - 11 - 20 MR. PAUL: A hundred and seventy three is with the increase, isn't it? MR. BLOUGH: With the increase. H.M.JR: From what date to what date? MR. BLOUGH: November '40, to November '41. H.M.JR: Go ahead. MR. BLOUGH: And that practically - well, about nineteen dollars of that, they figure, though their calculations don't all check, about nineteen dollars of that twenty-two went into higher food, clothing, and housing expenditures. In the case of food - well, in the case of all of them, they bought more. The increases in prices were not sufficient to off- set the increase in wages and they bought more, especially in the case of clothing. H.M.JR: You mean they bought more clothing? MR. BLOUGH: More or higher priced clothing and they bought more or higher priced housing, because the indexes in those particular fields didn't go up as much as their expenditures went up and they also increased their other expenditures like expenditures on cars and household operations, installment purchases and personal care by a somewhat higher percentage but it is still, of course, & very small proportion of their total. I don't know if that is sufficient for you or not. H.M.JR: That is enough. This is the way I feel, gentlemen. I look at this thing from the social view- point and I can't look at it whether this is the way to defeat the sales tax or whether it isn't. But feeling the way I do at this particular stage of the war effort, and until I am convinced that Congress means to close up these billion dollar loop-holes which I mentioned in Cleveland, I am not going to recommend lowering it. I can't do it. My conscience won't let me. I know what is going on in the automobile industry. They want to Regraded Unclassified 21 - 12 - give these people their twenty-four dollars a month to tide them over. They pay the automobile companies the price to tear the machinery down and they set a price aside - money aside to put it back into place again. Incidentally, couldn't we get a copy of one of those contracts? MR. SULLIVAN: Sure. H.M.JR: Will you get me one of those? MR. SULLIVAN: Yes. H.M.JR: I would like to see one of those contracts. I understand they pay them to take the machinery down and they give them money to put it back, but they won't pay the human beings. MR. SULLIVAN: Any reason why I shouldn't ask Bob Patterson to send me one? H.M.JR: I would like you to, on one of these change-overs. MR. SULLIVAN: One of those tank factories, for instance. H.M.JR: Any one where there is a change-over, not a new factory. MR. SULLIVAN: No, I understand. H.M.JR: There is much more reason to pay the man while he is being changed over-- MR. PAUL: Oh, I agree with that but I consider that an isolated problem. I am for paying them, but I don't-- H.M.JR: Well, Randolph, I have had lots of time, you know. We started discussions of this very thing about two months ago. MR. PAUL: When I was the other way around. - 13 - H.M.JR: Well, I have had two months and after carefully thinking of it, I just cen't. And the temper of the times, the temper of the Congress against all social effort, whether it is farm security or anything that is to help the lower one third, I can't sit here and be the fellow to go after the lower one, and I am not convinced and I wish I could get hold of one or two people - I am not convinced that - I mean, I won't take statistics that the people in the lower one third are the people who are going to cause inflation and price rising. Nobody has yet been able to sell it to me. No one has been able to sell it to me. MR. SULLIVAN: de am rather arguing against my own point here, but you should have this information. It was made very clear by Mr. Doughton last night that no increases in Social Securitys are going to be considered at this session if he can possibly avoid it. I asked if he wanted to have the two combined and both he and George immediately said, "Certainly not." and then Doughton said, you recall, Randolph--he whirled on me and said, "If anybody thinks they are going to get my committee to consider another bill after -Ne get through with this one, they have got another think doming." MR. PAUL: Yes, He also said, "Social Security is a year's fight." H.M.JR: Well, gentlemen, I don't want to sound bumptious or anything else, but the only support that I can get in this country is from the working man and the working woman in a real tax program and I am not going to hit them first and then pray that I will get the other fellows with the loopholes afterward. MR. SULLIVAN: You are not going to get them. MR. PAUL: Of course we were contemplating the loopholes. In fact, that is what we thought about yesterday. H.M.JR: All right, get those loopholes first. Regraded Unclassified 23 - 14 - MR. PAUL: That is reduced somewhat, by the way. H.M.JR: 1 know exactly what will happen. I will go up and favor this thing and we will hit the fellow from seven hundred fifty down to six hundred or what- ever you are talking about and we won't get the other and I can't do it. MR. PAUL: I can understand your attitude. H.M.JR: All of my training from my early boyhood days to this rebels against that kind of thinking. MR. PAUL: I can understand your attitude. I don't feel too dogmatic about the thing. H.M.JR: And I would like very much, Roy, if you would - if we could get hold of a couple of bright girls or boys just out of college and make our own little survey, see. Get 8 couple of boys or girls who have got a Ph.D. or something. You can get them at two thousand a year. I will put them on my own payroll. Let them get out and stay out. I would like to know, are we in the twenty-five dollar shirt era of the last World War. I mean, Col. Green- baum last night said that when Mr. Patterson testified, that Knudsen said, "I understand in my district that you are paying 8 hundred and ten dollars to the negro worker in the camp and 80 forth and so on." Greenbaum was give the job for Patterson to check up on the conditions. De said the only thing wrong with the figures is that it is an under statement. But I would like to go into some places like Hartford and Norfolk. I would like to send these boys or girls. We ought to be able to get women. Ask Miss Newcomery, who is supposed to be here, to give us 8. couple of Vassar girls. I am serious. MR. TARLEAU: To sample the purchasing? H.M.JR: To go in and see what they are doing. What in - Hartford is as good a place an any. - 15 - 24 MR. PAUL: Patterson, New Jersey would be a good place. MR. SULLIVAN: Hartford is number one on the list. They are throwing it away there at Pratt and Whitney. I know of a boy who wanted me to recommend him for an eighteen dollar a week job in November and he went in to a dentist the week end I was home and showed him his check for the last week with overtime, a hundred and five dollars. H.M.JR: Well, let somebody go into the very top and do it-- MR. BLOUGH: I know a corking good person over in the Women's Bureau if I could get them to loan her for a few weeks. H.M.JR: That would be good. Well, if she went out for a week you could see in the first week what she found. MR. BLOUGH: She has been out. She has been out. She may already know something about it. H.M.JR: What is the Women's Bureau? MR. BLOUGH: it is over with the Children's Bureau in the Security Agency. I will see what can be done. H.M.JR: Well, let her go to where the thing is the tops, in the Hartford area, or just let her spend a week there. What are these people spending their money for, see. MR. BLOUGH: Yes, I do. H.M.JR: I mean, I would like to know. I would like to go into some of these homes of these munitions workers and if they could talk to the wife -"Now, how much does your husband earn, what is your family budget, what are you doing, how much are you saving, 25 -16- how much is going to clothing, how much for food?" and are they buying pianos or Defense Bonds, see. MR. BLOUGH: Yes. H.M.JR: And if you haven't got the money, let the Defense Bond people pay for the survey, but let's quit looking at figures and let's get some facts. MR. BLOUGH: All right, good. H.M.JR: Don't you think it would be a good idea? MR. PAUL: *es. H.M.JR: This thing doesn't convince me, but I would like to know, are they buying pianos and musical instruments or-- MR. BLOUGH: Well, the C.I.O. doesn't think so. MR. SULLIVAN: Not from what I have seen. We have a lot of people in Manchester working in the Navy Yard. They are paying up doctor bills and all that sort of stuff. H.M.JR: Well, that is good. MR. SULLIVAN: That is just what we want to have done, but I think we want to take 8 sample of the whole country. H.M.JR: But the whole argument that everybody is advancing, we have got to tax the lower group because that is where you get your inflations. Well, I don't believe it. MR. SULLIVAN: And even if you do, Mr. Secretary-- H.M.JR: Excuse me one minute, John. MR. SULLIVAN: Certainly. - 17 - IS 26 H.M.JR: This is certainly an intelligent way. MR. PAUL: That is right. H.M.JR: Now, if it is going into the few luxuries that are left, O.K., I will take a fresh look at it. MR. BLOUGH: May I suggest this, that there is under contemplation - I am not sure that it has been decided on. I think it is more or less hush-hush at the moment. There is under contemplation having a sort of quarterly study of consumers' purchases. H.M.JR: It is no damn good. Look, for Defense Bonds - somebody told me the other day we ought to have an economist in Defense Bonds. We don't need one. We have got enough around here. We ought to have a couple of intelligent girls out all the time in the field finding out in these various areas - take some of these - jump them around, but le t's start at Hartford. I would like to know, for instance - they have got some shipyards somewhere on the Mississippi River. What are those people doing with that Money? It is a big country. They have got some shipyards in the Great Lakes. What do they do with their money? They have got shipyards around Seattle. What do they do with their money? Regraded Unclassified 27 - 18 - MR. PAUL: Some of the airplane factories, too. H.M.JR: Then go down to San Diego. What do the people down there - I mean, Defense Bonds could very well have one crew in four areas constantly studying this thing. I mean, the Treasury itself. Each agency is - Internal Revenue could chip in a little bit and Defense Bonds chip in & little bit, and you could have four crews going all the time so we get a fresh weekly report, so that I would know what these people - divide the country into four areas, what are they doing with their money. Then when the thing is getting out of hand - and you could ask Leon Henderson, has he got anything like that? MR. BLOUGH: Let me look into the matter and report back either tomorrow or Monday. H.M.JR: Don't take too much time about it. MR. BLOUGH: I mean today. H.M.JR: Henderson might have somebody. MR. PAUL: He may also have some data. MR. SULLIVAN: If they haven't anybody, they will get somebody if they get the idea. H.M.JR: Well, if he hasn't, it an outrage. MR. BLOUGH: I am sure there are several agencies doing this, but I agree we might do some of our own as & check. K.M.JR: Have you got the time to find out what is being done? MR. BLOUGH: I can find out before this evening what is being done in the Government and if the ground- work for doing something ourselves have-- H.M.JR: Until I find out what is happening and you know you could go - there must be commercial people-- Regraded Unclassified 28 - 19 - MR. PAUL: I wouldn't be surprised if the Federal Reserve had something on this in connection with their installment regulations. H.M.JR: Well, you take & concern like - if you had what Sears-Roebuck knew, you would be - it would be a pretty good cross-section. MR. SULLIVAN: The purchases from Sears-Roebuck alone would be a pretty good indication. H.M.JR: And I can get Nelson to do that for me. Why don't I just take two minutes and get Nelson on the wire? MR. SULLIVAN: I think it would be well worth while. H.M.JR: And tell him to send & - because he wouldn't know from which area though, would he? MR. BLOUGH: I don't know how closely they analyze their statistics. They have the opportunity to de it. MR. PAUL: We could discuss it with him in & little detail. H.M.JR: Could you? MR. SULLIVAN: Sure. H.M.JR: Well, you have got my idea. MR. SULLIVAN: Yes. H.M.JR: I mean, we all sit here and this fellow Friedman, he pulls out some statistics which are a couple of years old. They are theoretical. Brookings statistics are theoretical.. I would like to have once a week a report from four shopping crews, that is what it amounts to, to go into the shopping stores and say, "Mr. so and so in Seattle, well, what are you selling in this town, what are themselves. the people buying?" and then go to the families 29 - 20 - MR. SULLIVAN: I accept Friedman's figures, Mr. Secretary, but then I go on from there. Now, here is the fellow who earns seven hundred fifty dollars a year. He is single. You drop the exemption to six hun- dred. All right, he will pay twelve dollars a year in income taxes at the present rates. Now, I don't think that the twelve dollars we take out of him is going to contribute an awful lot to defeat inflation. H.M.JR: Well, if you people do the things so well, stop being theoretical. I am not impressed with the CIO figures, I am not satisfied, and I think that from the Defense Bond standpoint and the tax standpoint the Treasury ought to know every week, and that our figures should not be over ten days old. I would like a check every ten days, and by God, Leon Henderson ought to have something over there. MR. PAUL: I won't be surprised. H.M.JR: Would you like to know what you are doing? This is Dow Jones, "Treasury tax experts are trying to work out provisions which will preserve the basic policy of the excess profits tax. This was disclosed last night by Chairman George following a conference between Treasury and Congressional spokesmen. The present excess profits tax law gives corporations exemptions amounting to," and so forth. "Chairman George said that experts are consider- ing plans to tighten up the excess profits by making other adjustments which would not require changes in policy. Such proposals would avoid basic changes in the tax plan. Chair- man George says the Treasury plans a withholding tax." Well, that takes care of that for the moment. Now, let me take up the next thing, withholding tax. MR. PAUL: All right. H.M.JR: Well, I mean, let's keep on and settle one thing after another. What is the position on the with- holding tax? 30 - 21 - MR. PAUL: Suppose we have Tommy tell us the technical situation on it first. We all, I think - you (Sullivan) are for the withholding, aren't you, John? MR. SULLIVAN: Yes, I think I am a little stronger for it than-- MR. PAUL: We are all pretty strong. MR. SULLIVAN: I know you are all strong for it, but I think that is the keystone of any fight against inflation. The only difference I have with you is on any kind of enforced saving feature attached to it. To that I am opposed. MR. PAUL: Our enforced savings feature was attached only to the reduction of exemptions. MR. SULLIVAN: That is right. MR. PAUL: We have no forced savings feature attached-- MR. SULLIVAN: Then, we are in entire accord. H.M.JR: I thought you did have an enforced savings on the very lowest level. MR. PAUL: Only in case we reduced the exemptions. H.M.JR: I see. MR. PAUL: It might be that we ought to have some forced saving in connection with deduction at the source if we put it on too fast. H.M.JR: Somebody state the withholding tax thing for me, will you please? MR. TARLEAU: Well, we weren't proposing a separate tax, but we were proposing to collect part of the forty- two liabilities in 1942. Let us say that we would start 31 - 22 - July 1 and collect ten percent at the source on & net amount, that is, on wages and salaries, the ten percent to be computed after deducting the pro rata part of the credit exemption for dependents. H.M.JR: I don't understand that. MR. TARLEAU: Let us say that a person is paid by the week, Mr. Secretary. We could divide his personal exemption on credit for dependents by fifty. You see, there are fifty-two weeks in the year. Let us say that would amount to twenty dollars a week, just for conven- ience. He has paid thirty dollars a week. We deduct the twenty from the thirty, leaving ten dollars, and we would collect ten percent of that ten dollars or one dollar at the source every week. H.M.JR: His exemption is ten dollars. MR. TARLEAU: A week. H.M.JR: And he gets paid thirty. MR. TARLEAU: Thirty. H.M.JR: And the difference is-- MR. TARLEAU: Ten dollars. H.M.JR: And you take ten percent of that. MR. TARLEAU: That is right. MR. PAUL: We only withhold on the amount over the exemption. - 28 - 32 H.M.JR: I bee. And that in really collecting taxes 20 advance. MR. TARLRAU= That is really collecting part of his 142 taxon in 1942. MR. PAUL: It advances the collection date. MR. TARLEAU: From the fifteenth of March to those weekly payments during 1942. H.M.JR: Why do you say no? MR. BLOUGH: I didn't say no, I am sorry. H.M.JR: oh, I am sorry. MR. TARLEAU: That is 0.8 you understand It, isn't it? MR. BLOUGH: Yes. In other words, you are paying in 1942 part of what you otherwise would have had to pay anyway in '43. H.M.JR: What 1s the idea of advancing it by six months, eight and 8: half months? MR. SULLIVAN: Because the bill won't be passed 80 you can get it into effect and also because they have got to have the first six months of this year to pay up tax liabilities that accrued last year. H.M.JR: They won't pay it up in the first six months. Regraded Unclassified 33 - 24 - MR. SULLIVAN: Most of the little fellows will. H.M.JR: Will they? MR. SULLIVAN: I think SO. H.M.JR: But I mean, what is the idea? Is this a curb against inflation? MR. SULLIVAN: Yes. MR. PAUL: That is the first. There are two or three reasons for it. One is that by advancing the collec- tions from six months to, a year you have a more immediate check on inflation. Secondly, with so many millions of taxpayers as we now have it is just impossible to enforce the law. A lot of them will get out of it by not filing returns, but when the employer has to file a return, we will get the money. The third thing is that it is on - it saves for these people. They don't get the money and spend it, it is taken out at the source. MR. SULLIVAN: It is a very distinct convenience to the tax payer, Mr. Secretary. H.M.JR: And you don't want to - out of that dollar you don't want to set some of it aside in a bond for them. MR. PAUL: We haven't contemplated that. - 25 - 34 MR. SULLIVAN: No. H.M.JR: Do that on a volunteer basis. MR. SULLIVAN: Yes. MR. BLOUGH: Unless the personal exemptions were lowered, in which case we will. MR. PAUL: That is right, we contemplated that in connection with the lowering of the exemptions, taking the sting out of that. H.M.JR: And then this dollar which he pays in July, he won't have to pay it again. MR. SULLIVAN: No, sir. It is not an additional tax. It is merely a method of collecting what would otherwise be due March 15 through the year as he earns it. H.M.JR: I see. So he would be paying - well, you are advancing the payment date by six months. MR. BLOUGH: He pays as he goes. MR. SULLIVAN: By eight and a half months. MR. PAUL: Yes, that is a good way to put it. Just like we have been saying we ought to do. H.M.JR: Is ten percent a good rate? MR. PAUL: We contemplate holding at the lowest sur- tax rate, whatever that is. Four percent normal plus the lowest surtax rate, but we also contemplated there a flexibile plan whereby you could fix the rate of withhold- ing within limits. You (Tarleau) had a conversation on that. MR. TARLEAU: Yes. Mr. Stam felt that - I talked to him about giving you the power to fix the rate of with- holding, and he said that he felt that up to ten percent Regraded Unclassified 35 - 26 - he would be willing to see you empowered to fix the rate of withholding. H.M.JR: You mean, from one to ten? MR. TARLEAU: That is right, anything from one to ten. You might feel ten percent was too much to with- hold from the source at this time, and you might want to withhold only five percent. H.M.JR: This is against an argument which we sat around with Barnard on a long time ago. It goes back to when? MR. PAUL: We were talking about an entirely different sort of withholding tax then. We were talking about a supplementary tax on top of everything else. We are talking now about an advance in the collections. H.M.JR: I thought it finally revolved itself that way. MR. SULLIVAN: It did, that is right. H.M.JR: What month was that, November? MR. SULLIVAN: October and early November. MR. BLOUGH: It started in October and wound up in December. H.M.JR: Well, O.K., I would go along with you on that, so that is that point. MR. TARLEAU: I think that will be a very helpful point because Mr. Stam feels that it would be suitable, and it has all the advantanges that Mr. Paul outlined to you. H.M.JR: Well, I think that is all right. Let's see, we have got the lowering of exemptions, and we have got the withholding. What is the next most controversial one? Regraded Unclassified 36 - 27- MR. SULLIVAN: Excess profits. MR. PAUL: Corporate tax. H.M.JR: Corporate and excess? MR. PAUL: Yes. H.M.JR: Let's tackle that. We will clean up some of these things. MR. PAUL: The first thing I think we ought to settle about that is the excess profits rates. We have contem- plated in our tentative discussions raising the rates - the whole rate schedule. The top rate is now sixty per- cent. We propose to raise it to seventy-five percent at the top and correspondingly along the line. H.M.JR: Oh, the excess? MR. PAUL: This is only excess profits. Now, we will come - this corporate tax problem has several facets. We will come to them. Let's take one at a time. In the raising of the excess profits tax rates, that is one of the main items of the corporate tax problem. H.M.JR: What is it now, the excess? MR. PAUL: Sixty percent is the top rate. We pro- pose to raise that as high as seventy-five percent which, with other changes which we will come to later, brings up the marginal rate problem. Now, the marginal rate under our present contemplated program is about eighty-five percent, isn't it, Roy? MR. BLOUGH: Well, under the one we have in there, it is higher than that. MR. SULLIVAN: Eighty-seven and a half. MR. BLOUGH: In that one in there, it must be eighty- nine. Regraded Unclassified - 28 - 37 MR. PAUL: That bring up the idea of reducing the marginal rate by your re-employment plan. That is, hold- ing that excess over eighty percent top rate in reserve for the corporation on certain conditions of re-employ- ment. Now, that is - I don't know, John, I think with that re-employment, you are not against that, are you? MR. SULLIVAN: Yes, I am. I think that the danger, and the only danger in our going ahead on these rates is that we will get up to a rate on the marginal dollar where the company that is in that highest bracket will feel, "Well, why should I take this extra contract here? If I make money on it, I am only allowed to retain twelve and a half percent. Now, I don't think that is prudent, Randolph, tc say that we are going to take eighty-seven and a half percent and give back seven and a half. The immediate job is to get out production in this war, and I think it is more important to get your eighty rather than to take eighty-seven and 8. half and agree maybe, if certain things happen sometime later, to give them back seven and a half. H.M.JR: But, as I understand it, that isn't correct. If it is, I misunderstand it. If a company earns 8. mil- lion dollars we don't propose to take eight hundred seventy-five thousand dollars away from them? MR. PAUL: No, that is right. MR. SULLIVAN: That is right. H.M.JR: So when he sits down to figure - when he sits down to figure, as I understand the thing, he has very much more than that left. He may have, on these figures, as I get it, almost a third of his earnings left. MR. SULLIVAN: We are talking about two different situations, Mr. Secretary. MR. PAUL: Well, he is right on that. MR. SULLIVAN: Yes, he is right on the point he is Regraded Unclassified - 29 - 38 talking about, but it isn't the point I am talking about. H.M.JR: Let me just talk about the point you raised. You said a fellow, if he figures there is only going to be twelve and a half percent left, why should he take the contract, and I think that is wrong. MR. SULLIVAN: No, sir, it isn't, and if you will let me tell you, I will explain why. Here is a man who, when he earns a million dollars, gets into the top bracket, and everything he earns above that he pays eighty-seven and a half percent on. Now, I am not worried about the fellow-- H.M.JR: Everything above the million? MR. SULLIVAN: That is right. H.M.JR: Well, this is right. MR. SULLIVAN: Yes. Once he gets into the top bracket, everything he earns above that, under this system, he pays eighty-seven and a half percent. Now, what I say does not apply to the concern that hasn't gotten up into the top bracket. What I say does apply to all the concerns who are already in the top bracket without taking the addi- tional contracts. H.M.JR: Well, how do you get the eighty-seven and a half? MR. SULLIVAN: Seventy-five percent on excess profits. Then half of the balance - say he has got a million dol- lars. Let's suppose this is above the top rate. Seven hundred fifty thousand of that will go in excess profits. That leaves two hundred fifty thousand of which fifty percent will go in your normal and surtax, 80 that there will be left a hundred and twenty-five thousand out of the million. H.M.JR: No, I don't think that-- MR. SULLIVAN: Well, these gentlemen will tell you. Regraded Unclassified - 30 - 39 H.M.JR: I asked to have some examples. MR. PAUL: We have some. H.M.JR: Let me have some examples. MR. BLOUGH: I doubt if there is an example of that in there. I have got a bunch of examples, but not of that. H.M.JR: Let me have some examples. MR. BLOUGH: Look at it this way. Suppose the fellow already has a million, and he is considering a contract which will make him another dollar. H.M.JR: You mean a million net? MR. BLOUGH: He already has-- MR. PAUL: Let's take a simpler example than that. Let's get this point clear. MR. BLOUGH: Suppose he already has a million dollars and he is considering a contract which will make him another hundred thousand. Now, on that million dollars we assume, for the purposes of this example, that he is paying excess profits tax and that he is up in the top brackets of the excess profits tax, so that on each ad- ditional dollar, the maximum rates will apply. Now, if he makes another hundred thousand dollars and our excess profits tax rates are seventy-five percent at the top, then the first thing we will do is to take seventy-five thousand dollars in excess profits tax. That will leave him twenty-five thousand dollars. Now, this does not relate to his - he will have more of that left. This is the additional hundred thousand dollars. Now, that twenty-five thousand he has left after the excess profits tax, I think Mr. Sullivan had in mind a rate of fifty percent-- MR. SULLIVAN: We all have, Roy. 40 - 31 - MR. BLOUGH: ... of normal and surtax combined. I think it will have to be higher than that to make the three billion. MR. SULLIVAN: Call it just the fifty. H.M.JR: Fifty on the-- MR. BLOUGH: Fifty of normal and surtax. MR. PAUL: Fifty on the profits that are left after the deduction of the excess profits tax. H.M.JR: Oh, yes. You said he was going to have another contract which was going to furnish him a hundred thousand dollars. The excess profits is seventy-five, which leaves him twenty-five thousand. MR. BLOUGH: That is right. H.M.JR: Now, what we are arguing about, what are you going to do with that twenty-five thousand? MR. BLOUGH: Take fifty percent of that in normal and surtax. H.M.JR: That is Sullivan's point. MR. BLOUGH: Yes. And that will mean that he will pay twelve thousand five hundred in normal and surtax, which, added to his seventy-five thousand excess profits tax, will mean that on that hundred thousand dollars he will have a total new tax of eighty-seven thousand five hundred. He will have left for his wife and kiddies the twelve thousand five hundred, so that the top rate there, under that proposal, is eighty-seven and a half percent. H.M.JR: Well, then, is the whole argument - let me get this thing straight. Is everybody agreed that the excess profits should be seventy-five percent? MR. BLOUGH: No, I don't think Mr. Sullivan agrees with that. 41 - 32 - MR. SULLIVAN: No. H.M.JR: I mean, are we arguing about the seventy- five or what is left afterward? MR. PAUL: The seventy-five is mostly what brings up the problem. MR. SULLIVAN: You can't disassociate these different factors, Mr. Secretary. The thing that concerns me, I am willing to go just as far as we can go on corporations, but I don't think we should get up to a marginal rate that will-- H.M.JR: How high would you go-- MR. SULLIVAN: Well-- H.M.JR: ... on the excess? MR. SULLIVAN: I don't know. H.M.JR: Well, you ought to know by now, John. MR. SULLIVAN: I beg your pardon, sir, this is the toughest one in the whole thing, and I don't think there is anybody in the room who knows how far we should go. MR. PAUL: We asked Senator George last night. H.M.JR: Let's go around, and we will ask you last. What do you (Paul) think it should be? MR. PAUL: I am getting very rapidly to the point with Harry White where I think we can go as high as we want to go, but we don't want to - we just - the corpora- tions, along with everybody else, have to make things now to win the war, and I would go, if necessary, to ninety percent. I don't think we have to. Harry White said the other day, jokingly, "You go to a hundred percent." I am just not worrying so much about that with the war going the way it is now. I think we have got to have more 42 - 33 - to win the war. H.M.JR: That still doesn't give my answer. MR. PAUL: I would go eighty-five percent. H.M.JR: Eighty-five percent excess? MR. PAUL: Eighty-five marginal dollar rate, yes. H.M.JR: How much excess profit? MR. PAUL: Seventy-five. H.M.JR: And that would make the normal and the - what is the other tax? MR. PAUL: Surtax. H.M.JR: Fifty? MR. PAUL: That is about - yes. We have another tax we want to talk about, but the total would be about eighty- five percent marginal dollar rate, or eighty-seven, and I would go that whole hog. Senator George said last night he would go eighty-five percent, didn't he, John? MR. SULLIVAN: Eighty, I think he said. MR. PAUL: I think he said eighty-five. MR. SULLIVAN: Anyway, it doesn't make any difference. H.M.JR: Where would you go, Tarleau? MR. TARLEAU: If we do the other things that are in the program, I would go as high as eighty-seven and a half percent which is what we have outlined here, .if we do the other things in the program. I think we need addi- tional relief for hardship cases in the excess profits tax. If we do that, I would go up on eighty-seven and a half percent. - 34 - 43 MR. PAUL: Plus the inventory provision and so forth. MR. TARLEAU: Various other revenue provisions in there to have a fair tax. MR. PAUL: Plus the re-employment fund return. H.M.JR: Well, I will come to that. MR. PAUL: But that affects this question, you see, because if you take eighty-seven and a half and give seven and a half back, you are only net taking eighty. H.M.JR: What you are talking about is this. You are proposing, I take it, to take eighty-seven and a half and then set seven and a half in a fund to be paid back after the war is over, is that right? MR. PAUL: That is right. That. is your re-employ- ment fund. H.M.JR: The seven and a half? MR. PAUL: Yes, whatever figure is necessary to bring it down to eighty. MR. TARLEAU: In that example, it would be seven and a half percent, yes. MR. PAUL: In the last war we had a marginal rate of eighty- two and a half percent, didn't we? MR. BLOUGH: I am not willing to go net beyond eighty percent. If you have this re-employment fund set up sufficiently definitely that the businesses can count on it, I am willing to go as high as ninety. I don't think we should go above ninety even in total, including everything we take from them. H.M.JR: You raise the eighty-seven and a half to ninety? - 35 - 44 MR. BLOUGH: I wouldn't go any higher than we need to to get our money. H.M.JR: Let's stick to the eighty. As I understand it, they say seventy-five percent excess profits, and these other taxes going up to eighty-seven and a half, and then we set aside seven and & half in a reserve, and you say you would be willing to go up to ninety. Give them a ten percent reserve, is that it? MR. BLOUGH: You asked my top limits. Those are my top limits, and I prefer to go below them. Ninety and eighty would be the top limits, ninety to be taken away from them and eighty to be kept away from them. H.M.JR: Well, you are together. MR. PAUL: We are all together. H.M.JR: Now where does John come in? MR. SULLIVAN: Well, the present marginal rate is seventy-two percent. I would be willing to raise that to eighty. I think you are biting off your own nose if you try to take ten more and give it back to them on certain contingencies. For whatever there may be in what I say about people not being anxious to earn more money, you are throwing that away. I don't see the point of taking an extra ten percent away and then promising to turn it back to them on some contingency. You see, the concern who is now in the top bracket, Mr. Secretary, under the present rates, on a hundred thousand dollars extra profit, is allowed to retain twenty-eight percent or twenty-eight thousand. This reduces that from twenty- six thousand to twelve thousand five hundred. It cuts it more than half. So that you are more than halving the profit a concern can make if he makes a profit on an additional contract. Now, I say to cut that down to twelve thousand five hundred and then to agree to restore seventy-five hundred at some time in the remote future when, as, and if certain things happen isn't going to make him feel too good. Regraded Unclassified - 36 - 45 H.M.JR: Well, I happen to be very strong for the reserve fund. MR. SULLIVAN: Yes, I understand that. I don't. I would be if we weren't working on such a narrow margin, but we are on such & terribly narrow margin that I am afraid concerns are going to be reluctant, concerns who are in this particular situation are going to be reluc- tant to take on additional contracts. H.M.JR: Well, here is the point. I happen to know B. man who works for one of these investment people. He went out recently into Ohio. We all talk about what we think and none of us know. This fellow visited two or three of these tire companies trying to find out - their attitude was this: "We are so swamped with business we don't know what to do, and we just have no idea whether we are making or losing money, and we are not particularly interested." He visited three of them, their comptrollers, trying to find out about the tire industry. This hap- pened last week. This was three big ones. This just happened. I say it is the kind of thing I am always hungry for. He visited them and said their only worries were, could they turn out these entirely new things that the Government had given them, but they weren't- - they just don't know-- MR. PAUL: I think if we don't get that attitude, we are not going to win the war. H.M.JR: It was either Goodyear or Goodrich who have laid off two thousand salesmen and taken one plant down entirely, the entire machinery and greased it and put it away. The Government paid them to do that, and they were putting in - what were they making? It seems impossible. It was something 80 foreign to the tire business that they were making. MR. SULLIVAN: Tail fins. Tails on airplanes. There is a big ad in "Life" today or in "Time" yesterday. H.M.JR: Anyway, it was something quite foreign. Regraded Unclassified - 37 - 46 But that was the thing that he was told by the comptrollers of these big companies. They were 80 overwhelmed - they were just interested in one thing. Every day the Govern- ment gives them more business, and they weren't talking profits at all, John. MR. PAUL: That is a very promising sign. H.M.JR: This man visited the three. He visited Firestone, Goodyear, and Goodrich last week or the week before. It was within the last ten days. It is just one case where these people - I suppose those three together must do quite a tidy business. MR. PAUL: Well, if we don't all do that, we are not going to win. We are going to think of the dollars-- MR. SULLIVAN: Well, the fact remains there are an awful lot of people in the country who still are thinking of it, Randolph. I agree with you that that is the way things should be, but my only concern with that, Mr. Sec- retary, is that we mustn't go so far that we will retard full production. H.M.JR: Well, I told Nelson to give me a call any day on the telephone when anything that the Treasury was doing in any way was retarding his program. I told him that two weeks ago, and I have yet to get a telephone call from him. MR. SULLIVAN: I think Randolph and I ought to try to have lunch with him on this other thing, this purchas- ing business. Why don't we put this up to him and see what he says? H.M.JR: It is all right. MR. SULLIVAN: I think we can talk safely with him on that, don't you, Randolph? MR. PAUL: Oh, sure. H.M.JR: I think he should be talked to. I think you Regraded Unclassified 47 - 38 - should also talk to Patterson and Forrestal. MR. PAUL: All right. H.M.JR: Because the last word I have got is that the Army is not cognizant of the fact that Nelson has made a single change. I only heard that yesterday. As far as the Army is concerned, they don't know. MR. SULLIVAN: Want us to introduce him? H.M.JR: Well, that may sound silly, but that was practically - I mean, this is in the room. I was told that Patterson said, "When am I going to hear what Nelson is doing?" I only heard that last night. He said, "When am I going to find out what Nelson is doing? As far as the Army is concerned, we don't know that he is doing anything.' This is in this room. So I don't see why it wouldn't be a very good idea to get hold of Patterson and Forrestal and Nelson and say, "We are proposing this eighty-seven and a half percent with seven and a half percent in the Treasury on non-interest bearing funds for these corporations to set the wheels of industry going when the war is over. MR. PAUL: I think it would be a good idea. That is my whole thought all the time, to coordinate with these other agencies. H.M.JR: Those would be the three. MR. PAUL: I know what some of them think already. H.M.JR: Those would be the three men. They are responsible for production. MR. SULLIVAN: That is right, they are the three. H.M.JR: Why not put it up to them? As of today, I am all right on the eighty-seven and a half. MR. PAUL: We can see them as soon as they can see us. Regraded Unclassified - 39 - 48 MR. SULLIVAN: That is right. I will call them right after this. H.M.JR: I think this is a good time to stop right now. I will give you either nine or ten tomorrow morning. MR. PAUL: All right. I would like to say that we have here a program - tax program here in this volume-- H.M.JR: Supposing I got an appointment with the President tomorrow, what would we do? MR. PAUL: We have some summaries. We have a summary of our tax program that will have to be changed because of the reduction of the exemptions. H.M.JR: Can that be changed? MR. PAUL: We can do that this afternoon. Then we have a summary of the principal items, which is three or four pages. We can even reduce that to a smaller space. H.M.JR: That is all right. MR. PAUL: Then we have exhibits and various rate schedules and material that shows our individual rates. Then we have over here your statement rewritten and examples of various types over here. So that is your tax program. MR. SULLIVAN: Wait a minute, Randolph. H.M.JR: Let me keep this. I won't get a chance to look at this until after four. Can I give it to Roy, if there is any change to be made? MR. BLOUGH: We would like to have so revisions made in there. H.M.JR: Be sure, when I go home tonight, that I get it, will you? MR. SULLIVAN: Your personal exemptions have got to 49 - 40 - be changed there, Randolph. MR. PAUL: Yes, we just mentioned that. H.M.JR: That is a good job. Let me ask you gentlemen this. Let me change the subject for a minute. I am talk- ing Sunday night at eight o'clock for seven minutes on the radio with Brother Green of the AF of L, you see. I haven't looked at the speech yet. He is talking about seven minutes. He is giving me a whole bunch of checks, you see. Is there anything that I should talk to labor about about taxes that I want to kind of get them interested in? Is there anything we can say? MR. PAUL: Well, I think you might-- MR. SULLIVAN: When is this? H.M.JR: This Sunday, two days from tonight. MR. PAUL: Labor pretty well knows. H.M.JR: Is there anything I don't want to say? MR. PAUL: I saw Murray the other day at lunch, and he expressed himself as being pleased. H.M.JR: I meant on the air. Is there anything I want to say on taxes? MR. SULLIVAN: Whatever you say will be incidontal, won't it? MR. PAUL: I think Sunday night is a bad time. MR. SULLIVAN: It would be 8. small part of seven minutes. H.M.JR: That is right. MR. SULLIVAN: I don't think so. I think that some- time pretty soon you had better make a tax speech, but I 50 - 41 - don't think I would want to have you get into an incidental thing. MR. PAUL: I think we ought to have a conference with Green and Murray and Leo Pressman and Hetzel and the AF of L man. I think you ought to take some time, because they are going to be our chief supporters. H.M.JR: I know it. That is why I don't want to lower the thing. Hetzel will say, "Well, we won't criticize you much," but he isn't going to say, "We are coming out for you a hundred percent," but if we leave out this other thing, we will get some enthusiasm from him. MR. PAUL: We are going to get it. I have got a resolution here passed by them, the CIO-- H.M.JR: But if I made my speech lowering the exemptions to six hundred dollars-- MR. SULLIVAN: Well, the resolution is against lower- ing it. H.M.JR: It is? MR. SULLIVAN: Sure. All the resolutions from labor that are coming in are against it. MR. PAUL: The resolution has some point on this seven and a half percent rate. They recommend increasing normal taxes, excess profits taxes, taxes on present individual tax base, I mean by not lowering the exemptions, closing the loopholes, increased rates, lowered exemptions on the state taxes and excise taxes on certain luxury things, and then they come out against the sales tax. H.M.JR: Who is this? MR. PAUL: CIO. H.M.JR: Has that been acknowledged? - 42 - 51 MR. PAUL: Yes. MR. SULLIVAN: Mr. Secretary, there is one thing we should talk to you about very soon and that is this extension of time for filing excess profits tax. The accounting industry and the corporations themselves are in a very, very difficult position. H.M.JR: Well, let's do it at the next meeting we have. You will get a chance. I will see you again between now and sunset tomorrow night. MR. SULLIVAN: That is fine. MR. PAUL: I would like to leave with you a very dirty editorial, "Treasury Masterpiece." It is in this morning's News. I think it is one of the dirtiest edi- torials I have seen. H.M.JR: Masterpiece of what? MR. PAUL: It is against your tax literature. MR. BLOUGH: Savings Bonds? MR. PAUL: No, I think it is the tax anticipation. It isn't quite clear. Yes, it is the Defense Bonds thing. You don't need to read the whole thing. It is just that part that is entitled, "Treasury Masterpiece." It is as dirty as it can be. H.M.JR: Is that us? That little thing up in the left-hand corner. Do we get that out? MR. BLOUGH: He attributes it to us. I don't know. MR. PAUL: He says we are writing down to the people as if they were morons. It is unfortunate they should take that position. H.M.JR: Look at the stuff today that - I understand Patterson and this reporter went to Pearl Harbor, and look 52 - 43 - at the report this morning that they are making from Honolulu. I will look into this. Ask somebody for me - no, I will ask Ferdie. MR. PAUL: All right. I just picked it up this morning. H.M.JR: O.K., I'll be seeing you. 53 TENTATIVE TREASURY TAX PROGRAM **** FEBRUARY 20, 1942 Regraded Unclassified BE 54 SUMMARY 55 February 20, 1942 TENTATIVE TREASURY TAX PROGRAM Summary I. Special privilege and hardship provisions 765.0 II. Individual income tax 3,000.0 III. Corporation taxes 2,830.0 IV. Estate and gift taxes 250.0 V. Excise taxes 1,200.0 Total 8,045.0 Less: Allowance for inter- related effects 1,000.0 Total 7,045.0 1/ The revenue under I will be higher than indicated if the rate changes under II and III are enacted; the revenue under II will be substantially lower if the rate changes under III are enacted. Regraded Unclassified 56 February 26, 1942 TREASURY TAX PROGRAM Revenue (spproximate) in millions of dollars I. Individual Income Taxes 3,000 Retain present exemptions Eliminate earned income credit Increase rates heavily throughout schedule II. Corporation Taxes 2,830 Retain the present excess-profits tax credit Increase excess-profits tax rates by 15 percentage points to a top rate of 75% Retain normal tax at 24 percent Increase surtax (to be designated "war surtax") to 36% with relief up to 20% for corporations having reduced incomes Smaller rate increases for corpora- tion incomes under $25,000 Repeal capital stock tax and de- clared value excess-profits tax III. Estate and Gift Taxes 250 IV. Excise Taxes 1,200 Distilled spirits increase from $4 to $6 a gallon 254 Gasoline increase from 184 to 30 a gallon 245 Cigarettes increase from $3.25 per M to $3.50 per M on 106 brands and $4 per M on 156 brande 163 Other excises 508 V. Special Privilege and Hardship Provisions 725 Tax-exempt securities: tax interest from outstanding and future State and local securities 200 Percentage depletion 50 Joint returns with special relief for earned income 350 Capital gains 35 Life insurance companies 30 Mutual casualty insurance companies. 30 - Other Grand total 8,005 Less: Allowance for inter- related effects 1,005 Total 7,000 Regraded Unclassified PROGRAM 58 February 20, 1942 TENTATIVE TREASURY TAX PROGRAM Revenue (spproximate figures to be revised) in millions of dollars I. Special Privilege and Hardship Provisions 1. Tax exempt securities: Eliminate 200.0 exemption from income and profits taxes with respect to the interest from all (outstand- ing and future) State and local governmental obligations. 2. Percentage depletion 60.0 011 and gas: Limit percentage depletion for existing properties to 5 percent except in the cases where intangible drilling costs have been capitalized, in which event the allow- ance would be 15 percent; royalty interests to be excluded from the privilage of percentage depletion and to be restricted to cost deple- tion. For new discoveries the rate will be 27% percent to the participants in the dis- covery, with no option to expense intangible drilling coste; all other new oil and gas properties to be subject only to cost depletion. Other mines: Reduce percentage depletion allowance to percent. 3. Joint returns: Require Joint income 350.0 tax returns for all married couples, with relief for the working wife. 4. Capital gains: Long-term capital gaina 35.0 to be subject to B. maximum effective rate of tax of 30 percent (instead of the present 15 percent); capital losses not to be allowed 8.6 a deduction against ordinary income but solely against capital gains, with excess capital losses to be carried forward 88 an offect against future capital goine for a period of 5 years. Regraded Unclassified 59 - 2 - 5. Life insurance companies: Eliminate 30.0 the double deduction with respect to tax exempt interest and reduce the reserve earnings deduction. 6. Mutual casualty insurance companies: 30.0 Include in the tax base (a) the dividends paid to policyholders from investment income and -y (b) additions to surplus. 7. Bank expenses: Disallow as a deduction 60.0 against taxable income expenses properly allo- cable to tax exempt interest. 8. Other: Remove other special privileges - and eliminate hardships and inequities. Total 765.0 II. Individual Income Taxes 9. Surtax rates: Increase surtax rates 3,000.0 throughout and reduce width of lower surtax brackets. (ExhibitABC) D,E 10. Earned income credit: (a) Allow - 5 percent for both normal and surtax instead of 10 percent for normal tax only; (b) elim- inate $3,000 minimum and reduce $14,000 maximum to $2,500. 11. Withholding at source: Beginning July 1, 1942, withhold at source not to exceed 10 percent of wages and salaries in excess of prorated personal exemptions and 10 percent of the gross amount of dividends and bond interest, as partial payment of 1942 tax liabilities. (Exhibitf-K) For 1942 total withholding about $1.5 billion, Total 3,000.0 60 - 3 - III. Corporation Taxes (Exhibit L) 12. Excess profits tax: Increase rates 640.0 by 15 percentage points. 13. Normal tax: Increase normal tax 120.0 rate from 24 to 25 percent. 14. Surtax: For corporations of over 1,500.0 $50,000 increase surtax from 7 to 21 percent, with smaller increases for corporations with smaller incomes. 15. War tax: Impose a special war tax 750.0 of 10 percent allowing a tax credit of 5 per- cent of the amount by which the surtax net income of the taxable year is less than the average surtax net income of the years 1936 - 1939. 16. Capital stock tax: Repeal the capital -180.0 stock and declared value excess profits taxes Total 2,830.0 IV. Estate and Gift Taxes 17. Estate tax rates: Increase rates throughout. (Exhibit#,N,O) 18. Exemptions: In place of the exist- ing exemption of $40,000 and insurance exclu- sion of $40,000, allow a single exemption of $60,000. 19. Gift tax rates: Increase to three- fourths of revised estate tax rates. 20. Gift tax exemptions: Reduce exemp- tion from present $40,000 to $30,000. Change annual exclusion of gifts from $4,000 for each donee to a single exemption of $5,000. Total 250.0 Regraded Unclassified 61 - 4 - V. Excise Taxes 21. Distilled spirite: Increase rate 284.0 from $4 per gallon to $6 per gallon. 22. Gasoline: Increase rate from 116 245.0 per gallon to 30 per gallon. 23. Cigarettes: Increase rate from 163.0 $3.25 per M. to $3.50 per M. on 10-cent brands and $4 per M. on 15-cent brands. 24. Other excises. (Exhibit P) 508.0 Total excises 1,200.0 Grand total 8,045.0 Less: Allowance for inter- related effects 1,000.0 Total 7,045.0 1/ The revenue under I will be higher than indicated if the rate changes under II and III are enacted; the revenue under II will be substantially lower if the rate changes under III are enacted. EXHIBITS 4% 1 . 63 LIST OF EXHIBITS A. Individual income tax: Effective rates for married person without dependents - 1918 and selected taxable years 1929-'41 B. Comparison of individual surtex rate schedule under present law and proposel to raise approximately $3 billion with present exemptions 0. Amount of income taxes and effective rates under individual income tax - present law and proposal. Single person - no dependents - personal exemption $750. D. Amount of income taxes and effective rates under individual income tax - present law and proposal. Married person - no dependents - personal exemption $1,500 X. Amount of income taxes and effective rates under individual income tax - present law and pronosal. Married person - two dependents - personal exemption $1,500 - dependent credit $400 F. Comperison of increase in tax under pronosal end amount with- held at source with B. 10 percent withholding rate in effect for helf the year. Single - no dependents - personal exemp- tion $750 G. Commarison of increase in tex under pronosal and amount with- held at source with & 10 percent withholding rate In effect for a full year. Single - no dependente - personal exemp- tion $750 E. Comparison of increase in tax under proposal and amount with- held at source with a 10 percent withholding tax in effect for B. half year. Married - no dependents - personal exemption $1,500 I. Comparison of increase in tex under proposal and amount withheld at source with 8 10 percent withholding rate in effect for a full year. Married person - no devendents - personal exem- tion $1,500 J. Comparison of increase in tax under pronosal, and amount with- held at source with B 10 percent withholding rate in effect for one-half year. Married - two dependents - personal exemp- tion, $1,500; dependent credit $400 E. Comparison of increase in tax under proposal, and amount with- held at source with FL 10 percent vithholding rate in e ffect for A. full year. Married - two dependents - personal exemp- tion $1,500; dependent credit $400 Regraded Unclassified 64 LIST OF EXHIBITS - page 2 L. Proposed corporation tax plan with special war tax M. Effective estate tax rates before credit for State death taxes N. Comparison of estate tax rate schedule under present law and proposal to increase the tax yield by approximately $250 million with $60,000 specific exemption, no exclusion for life insurance 0. Comparison of present and proposed estate taxes on net estates of selected sizes P. Summary of excise recommendations through February 17, 1942 65 A INDIVIDUAL INCOME TAX Effective Rates for Married Person without Dependents 1918 and Selected Taxable Years 1929-41 PER PER CENT CENT 90 90 80 80 1940 70 70 1936-39 1941 60 60 Proposal 1934-35 50 50 40 40 30 30 1930-31 20 20 1918 1929 10 10 0 0 2 4 6 10 20 40 60 100 200 400 600 1000 2000 4000 NET INCOME IN THOUSANDS OF DOLLARS Office of the Secretary el the Treasury Dression of Tax Research B-230-1 I-E-revised Regraded Unclassified B 68 Organises of individual surter rate schedule under present law and proposal to raise approximately $3 Million will present exemptions Burtax : Bracket rate I Total surtex cumulative net income " -- I Present law : ($000) Proposal Present law : : : Proposal e - $ =5 6% 12% 30 60 +5 # 1 6 15 60 135 1 - 1.5 6 18 go 225 1.5 2 6 20 120 325 2 3 9 22 210 545 3 4 9 24 300 785 E 6 13 27 560 1,325 6 8 17 30 900 1,925 8 10 21 34 1,320 2,605 10 12 25 38 1,820 3,365 12 14 29 42 2,400 4,205 24 16 32 45 3,040 5,105 16 18 35 48 3,740 6,065 18 20 38 51 4,500 7,085 20 22 41 54 5,320 8,165 22 26 44 57 7,080 10,445 26 32 47 60 9,900 14,045 32 38 50 64 12,900 17,885 38 44 53 6g 16,080 21,965 Sile 50 55 72 19,380 26,285 50 60 57 76 25,080 33.885 60 70 59 78 30,980 41,685 TO 80 61 80 37,080 49,685 80 90 63 82 43,380 57,885 90 100 64 84 49,780 66,285 100 150 65 86 52,280 109,285 150 200 66 86 115,280 152,285 200 250 67 86 148,780 195,285 250 300 69 86 183,280 238,285 300 400 71 86 254,280 324,285 400 500 72 86 326,280 410,285 500 750 73 86 508,750 625,285 750 - 1,000 74 86 693,780 840,285 1,000 - 2,000 75 86 1,443,780 1,700,285 2,000 - 5,000 76 86 3,723,780 4,280,285 5,000 and over 77 86 - - Treasury Department, Division of Tax Research February 28, 1942 I-2 Revised - 3 C 70 Amount of income taxes and effective rates under individual income tax - present law and proposal Single person - no dependents Personal exemption $750 Net income : Amount of tex : Effective rates before : : : Increase : : Present Present : Increase in personal : : Proposal : : law in tax law :Proposal: effective exemption : : : : : : rates $ 800 $ 3 $ oa $ 5 .4% 1.0% 39 900 11 24 13 1.2 2.7 1.5 1,000 21 40 19 2.1 4.0 1.9 1,100 31 56 25 2.8 5.1 2.3 1,200 40 72 32 3.3 6.0 2.7 1,500 69 128 59 4.6 8.5 3.9 1,600 79 147 68 4.9 9.2 4.3 2,000 117 230 113 5.9 11.5 5.6 2,500 165 345 180 6.6 13.8 7.2 3,000 221 470 249 7.4 15.7 8.3 4,000 347 735 388 8.7 18.4 9.7 5,000 483 1,023 540 9.7 20.5 10.8 6,000 649 1,333 684 10.8 22.2 11.4 8,000 1,031 1,990 959 12.9 24.9 12.0 10,000 1,493 2,720 1,227 14.9 27.2 12.3 12,500 2,178 3.740 1,562 17.4 29.9 12.5 15,000 2,994 4,888 1,894 20.0 32.6 12.6 20,000 4,929 7,473 2,544 24.6 37.4 12.8 25,000 7,224 10,418 3,194 28.9 41.7 12.8 50,000 20,882 27,715 6,833 41.8 55.4 13.6 75,000 36,487 48,055 11,568 48.6 64.1 15.5 100,000 53,214 69,625 16,411 53.2 69.6 16.4 500,000 345,654 429,610 83,956 69.1 85.9 16.8 1,000,000 733,139 879,610 146,471 73.3 88.0 14.7 5,000,000 3,923,124 4,479,610 556,486 78.5 89.6 11.1 Treasury Department, Division of Tax Research February 28, 1942. I-1 Revised-3 D 72 Amount of income taxes and effective rates under individual income tax - present law and proposal Married - no dependents Personal exemption $1,500 : : Net income Amount of tax Effective rates : : before : personal Present : : Increse : Present : : Increase in : law : Proposal : : Proposal exemption in tax law : : effective : : rates $ 1,500 - - - - - - 1,600 $ 6 $ 16 $ 10 .4% 1.0% .6% 1,700 13 32 19 .8 1.9 1.1 1,800 23 48 25 1.3 2.7 1.4 1,900 32 64 32 1.7 3.4 1.7 2,000 42 80 38 2.1 4.0 1.9 2,100 52 99 47 2.5 4.7 2.2 2,200 61 118 57 2.8 5.4 2.6 2,300 71 137 66 3.1 6.0 2.9 2,400 80 156 76 3.3 6.5 3.2 2,500 90 175 85 3.6 7.0 3.4 3,000 138 285 147 4.6 9.5 4.9 4,000 249 535 286 6.2 13.4 7.2 5,000 375 805 430 7.5 16.1 8.6 6,000 521 1,100 579 8.7 18.3 9.6 8,000 873 1,735 862 10.9 21.7 10.8 10,000 1,305 2,435 1,130 13.1 24.4 11.3 12,500 1,960 3,425 1,465 15.7 27.4 11.7 15,000 2,739 4,535 1,796 18.3 30.2 11.9 20,000 4,614 7,060 2,446 23.1 35.3 12.2 25,000 6,864 9,960 3,096 27.5 39.8 12.3 50,000 20,439 27,145 6,706 40.9 54.3 13.4 75,000 35,999 47,425 11,426 48.0 63.2 15.2 100,000 52,704 68,965 16,261 52.7 69.0 16.3 500,000 345,084 428,935 83,851 69.0 85.8 16.8 1,000,000 732,554 878,935 146,381 73.3 87.9 14.6 5,000,000 3,922,524 4,478,935 556,411 78.5 89.6 11.1 Treasury Department, Division of Tax Research February 28, 1942 I-E Revised-3 Regraded Unclassified E 74 Amount of income toxes and effective Intes under individual income tax - present law and proposal Married person - Two dependents Personal exemption $1,500, dependent credit $400 Net income 1 Amount of tax : Iffective rates before $ Present 1 : I Present : : Increase in persenal : law 1 Proposal I Incomes : law : Proposal : effective exemption 1 : : in tax : 1 : rates $ 2,300 - - - - - - 2,400 $ 6 $ 16 $ 10 is 0.7% -4% 2,500 12 32 20 .5 1.3 .8 2,700 29 64 35 1.1 2.4 1.3 3,000 58 118 60 1.9 3.9 2.0 4,000 154 333 179 3.9 8.3 4.8 5,000 271 587 31.6 5.4 11.7 6,3 6,000 397 861 464 6.6 14.4 7.8 8,000 717 1,472 755 9.0 18.4 9.4 10,000 1,117 2,143 1,026 11.2 21.4 10.2 12,500 1,738 3,089 1,361 13.8 24.7 10.9 10,000 2,475 4,167 1,692 16.5 27.8 11.8 20,000 4,287 6,629 2,342 21.4 33.1 11.7 26,000 6,480 9,472 2,992 25.9 37.9 12.0 50,000 19,967 26,537 6,570 39.9 53.1 13.2 75,000 35,479 46,753 11,274 47.3 62.3 15.0 100,000 52,160 68,261 16,101 52.2 68.3 16.1 500,000 544,476 428,215 83,739 68.9 85.6 16.7 1,000,000 731,930 878,215 146,285 73.2 87.8 14.6 5,000,000 3,921,884 4,478,215 556,331 78.4 89.6 11.2 Treasury Department, Division of Tax Research February 38, 1942 I-3 Revised-3 Regraded Unclassified di a de - 25 76 Commission of increase in the ed amount as states with 1 10 persent withholding Sata in offect for & half THE Single - Dd dependants Parsonal eccomption $750 : Amount of LICE : : Percent : Percent of Net income : : Amount I of totaltinerause 1.18 before personal : Present : : Increase $ withheld 5 tex I fax 1 Inv 10 Proposal I exemption in tax : at woures (withheld twithhold as 1 I : I tab source! source 800 $ 3 $ 00 $ 5 40 3 37.5% 60.06 900 11 24 23 S 33+3 61.5 1,000 21 10 19 13 32.5 68.4 1,100 31 55 23 18 32.1 72.0 1,200 40 72 32 23 31,9 71.9 1,500 69 128 59 38 29.7 64.6 1,600 79 147 58 43 23.3 63.2 2,000 117 230 113 63 27.4 55.8 2,500 165 345 180 66 25.5 45.9 3,000 221 470 249 213 24.0 45.4 4,000 347 735 388 363 22.2 42.0 5,000 483 7,023 540 213 20.6 39.4 6,000 649 1,333 684 263 19.7 38.5 8,000 1,031 1.990 959 363 18.2 37.9 10,000 1,493 2,720 1,227 463 17.0 37-7 12,500 2,178 3.740 1,562 580 15-7 37.6 15,000 2,994 4,888 1,894 713 14,6 37.6 20,000 4,929 7,473 2,544 963 12.9 37.9 25,000 7,224 10,415 3,194 1,213 11,6 38,0 50,000 20,862 27,715 6,833 2,463 6.9 36.0 75,000 36,487 48,055 11,568 3,713 7.7 32.1 100,000 53,214 69,625 16,411 4,963 7.1 30.2 500,000 345,654 429,610 €3,956 24,963 5.6 29.7 1,000,000 733,139 879,610 146,471 49,963 5.7 34.1 5,000,000 3,923,124 4,479,610 556,486 249,963 5.6 44.9 Treasury Department, Division of Tax Research February 28, 2942. I-B Revised-3 76 Comparison of increase in tax under proposal and amount withheld at source with a 10 percent withholding rate in effect for a half year Single - no dependents Personal exemption $750 : Amount of tax : : Percent : Percent of Net income : : Amount : of total:increase in before : Present # : Increase : withheld : tax : tax personal : law : Proposal : exemption in tax : at source :withheld :withheld at : : : : :at source: source $ 800 $ 3 $ 8 $ 5 $ 3 37.5% 60.0% 900 11 24 13 8 33.3 61.5 1,000 21 40 19 13 32.5 68.4 1,100 31 56 25 18 32.1 72.0 1,200 40 72 32 23 31.9 71.9 1,500 69 128 59 38 29.7 64.4 1,600 79 147 68 43 29.3 63.2 2,000 117 230 113 63 27.4 55.8 2,500 165 345 180 88 25.5 48.9 3,000 221 470 249 113 24.0 45.4 4,000 347 735 388 163 22.2 42.0 5,000 483 1,023 540 213 20.8 39.4 6,000 649 1,333 684 263 19.7 38.5 8,000 1,031 1,990 959 363 18.2 37.9 10,000 1,493 2,720 1,227 463 17.0 37.7 12,500 2,178 3.740 1,562 588 15.7 37.6 15,000 2,994 4,888 1,894 713 14.6 37.6 20,000 4,929 7,473 2,544 963 12.9 37.9 25,000 7,224 10,418 3,194 1,213 11.6 38.0 50,000 20,882 27,715 6,833 2,463 8.9 36.0 75,000 36,487 48,055 11,568 3,713 7.7 32.1 100,000 53,214 69,625 16,411 4,963 7.1 30.2 500,000 345,654 429,610 83,956 24,963 5.8 29.7 1,000,000 733,139 879,610 146,471 49,963 5.7 34.1 5,000,000 3,923,124 4,479,610 556,486 249,963 5.6 44.9 Treasury Department, Division of Tax Research February 28, 1942. I-E Revised-3 3 the G 77 78 Comparison of increase in tax under proposal and amount withheld as source with a 10 percent withholding rate in effect for & full year Single person = No dependents Personal exemption $750 Het income # Amount of tax : Amount :Percent of:Percent of before per-: Present I I :withheld Increase total tax :increase in sonal exemp-1 law :Lropounl: in tax I at T rithheld :tax withheld 9.7.$1on # : : : source : at source: at source $ 800 $ 3 $ 8 $ 5 $ 5 62.5% 100.0% 900 11 24 13 15 62.5 115.4 1,000 21 40 19 25 62.5 131.6 1,100 31 56 25 35 62.5 140.0 1,200 40 72 32 45 62.5 140.6 1,500 69 125 59 75 58.6 127.1 1,600 79 147 68 85 57.8 125.0 2,000 117 230 113 125 54.3 110.6 2,500 165 345 180 175 50.7 97.2 3,000 221 470 249 225 47-9 90.4 4,000 347 735 388 325 44.2 83.8 5,000 483 1,023 540 425 41.5 78.7 6,000 649 1,333 684 525 39.4 76.8 8,000 1,031 1,990 959 725 36.4 75.6 10,000 1,493 2,720 1,227 925 34.0 75.4 12,500 2,178 3,740 1,562 1,175 31.4 75.2 15,000 2,994 4,888 1,894 1,425 29.2 75.2 20,000 4,929 7,473 2,544 1,925 25.8 75.7 25,000 7,224 10,418 3,194 2,425 23.3 75.9 50,000 20,882 27,715 6,833 4,925 17.8 72.1 75,000 36,487 48,055 11,568 7,425 15.5 64.2 100,000 53,214 69,625 16,411 9,925 14.3 60.5 500,000 345,654 429,610 83,956 49,925 11.6 59.5 1,000,000 733,139 879,610 146,471 99,925 11.4 68.2 5,000,000 3,923,124 4,479,610 556,486 499,925 11.2 89.8 Treasury Department, Division of Tax Research February 28, 1942 I-I Revised-3 Regraded Unclassified H of 80 Comparison of increase in tax under proposal and amount withheld at source with a 10 percent withholding rate in effect a half year Married - No dependents Personal exemption $1,500 Net income : : Amount of tax : Percent :Percent of before : : Amount of total : increase personal I : : :withheld : tax : Present in tax : : Proposal Increase exemption : :at source:withheld : withheld law : : : in tax : :at source: at source $ 1,500 - - - - 1,600 $ 6 $ 16 $ 10 $ 5 31.3% 50.0% 1,700 13 32 19 10 31.3 52.6 1,800 23 48 25 15 31.3 60.0 1,900 32 64 32 20 31.3 62.5 2,000 42 80 38 25 31.3 65.8 2,100 52 99 47 30 30.3 63.8 2,200 61 118 57 35 29.7 61.4 2,300 71 137 66 40 29.2 60.6 2,400 80 156 76 45 28.8 59.2 2,500 90 175 85 50 28.6 58.8 3,000 138 285 147 75 26.3 51.0 4,000 249 535 286 125 23.4 43.7 5,000 375 805 430 175 21.7 40.7 6,000 521 1,100 579 225 20.5 38.9 8,000 873 1,735 862 325 18.7 37.7 10,000 1,305 2,435 1,130 425 17.5 37.6 12,500 1,960 3,425 1,465 550 16.1 37.5 15,000 2,739 4,535 1,796 675 14.9 37.6 20,000 4,614 7,060 2,446 925 13.1 37.8 25,000 6,864 9,960 3,096 1,175 11.8 38.0 50,000 20,439 27,145 6,706 2,425 8.9 36.2 75,000 35,999 47,425 11,426 3,675 7.7 32.2 100,000 52,704 68,965 16,261 4,925 7.1 30.3 500,000 345,084 428,935 83,851 24,925 5.8 29.7 1,000,000 732,554 878,935 146,381 49,925 5.7 34.1 5,000,000 3,922,524 4,478,935 556,411 249,925 5.6 44.9 Treasury Department, Division of Tax Research February 28, 1942 I-E Revised-3 Regraded Unclassified 1 81 - 82 Comparison of increase in laz nd envent withheld at source with a 10 persent withholding rate in effect for a full year Married - no dependents Personal exemption - $1500 Net income 8 Amount of tax :Amount : Perdent 1 Percent of before # : : :Increasolwith- : of total (increase in personal I Present I I in sheld at 1 tax with- Itax withheld exemption I law # Proposal I tax :souree 1 hold at : at source I I : # : source : * 1,500 - - - - 1,600 $ 6 $ 16 $ 10 $ 10 62.5% 100.0% 1,700 13 32 19 20 62.5 105.3 1,500 23 48 25 30 62.5 120.0 1,900 32 64 32 40 62.5 125.0 2,000 42 80 38 50 62.5 131.6 2,100 52 99 47 60 60.6 127.7 2,200 61 118 57 70 59.3 122.8 2,300 71 137 66 80 58.4 121.2 2,400 80 156 76 90 57.7 118.4 2,500 90 175 85 100 57.1 117.6 3,000 138 285 147 150 52.6 102.0 4,000 249 535 286 250 46.7 57.4 5,000 375 805 430 350 43.5 51.4 6,000 521 1,100 579 450 40.9 77.7 5,000 873 1,735 562 650 37.5 75.4 10,000 1,305 2,435 1,130 850 34.9 75.8 12,500 1,960 3,425 1,465 1,100 32,1 75.1 15,000 2,739 4,535 1,796 1,350 29.8 75.2 20,000 4,614 7,060 2,446 1,850 26.2 75.6 25,000 6,864 9,960 3,096 2,350 23.6 75.9 50,000 20,439 27,145 6,706 4,850 17.9 72.3 75,000 35,999 47,425 11,426 7.350 15.5 64.3 100,000 52,704 68,965 16,261 9,850 14.3 60.6 500,000 345,084 428,935 83,851 49,850 11.6 59.5 1,000,000 732.554 878,935 146,381 99,850 11.4 68.2 5,000,000 3,922,524 4,478,935 556,411 499,850 11.2 89.8 Treasury Department, Division of Tax Research February 25, 1942 I-2 Revised - , Regraded Unclassified 83 J live : 84 Comparison of increase in tax under proposal and amount withheld at source with a 10 percent withholding rate in effect for a half year Married - two dependents Personal exemption $1,500, dependent credit $400 I Amount of tax : : Percent :Percent of Not income I : Amount : of total:increase in before 1 Present: personal : Increase : withheld : tax : tax I law : Proposal : ha : at source : withheld:withheld at exemption : : : : :at source: source $ 2,300 - - - - - - 2,400 $ 6 $ 16 $ 10 $ 5 31.3% 50.0% 2,500 12 32 20 10 31.3 50.0 2,700 29 64 35 20 31.3 57.1 3,000 58 118 60 35 29.7 58.3 4,000 154 333 179 85 25.5 47.5 5,000 271 587 316 135 23.0 42.7 6,000 397 861 464 185 21.5 39.9 8,000 717 1,472 755 285 19.4 37.7 10,000 1,117 2,143 1,026 385 13.0 37.5 12,500 1,728 3,089 1,361 510 16.5 37.5 15,000 2,475 4,167 1,692 635 15.2 37.5 20,000 4,287 6,629 2,342 885 13.4 37.8 25,000 6,480 9,472 2,992 1,135 12.0 37.9 50,000 19,967 26,537 6,570 2,385 9.0 36.3 75,000 35,479 46,753 11,274 3,635 7.8 32.2 100,000 52,160 68,261 16,101 4,885 7.2 30.3 500,000 344,476 428,215 83,739 24,885 5.8 29.7 1,000,000 731,930 878,215 146,285 49,885 5.7 34.1 5,000,000 3,921,884 4,478,215 556,331 249,885 5.6 44.9 Treasury Department, Division of Tax Research February 28, 1942. I-B Revised- 3 x 85 86 Comparison of increase in tax under preposal, and amount withhold at source with a 10 percent withholding rate in offect for M full year Married - Two Dependents Personal exemption $1,500, dependent credit $400 Bot income : I Amount of tax Amount (Percent of:Porcent of before per-1 : withheld :total tax lincrease in sonal exemp-1 T Present "Increase : : withheld : tax with- at tion 1 law I Proposal : in tax = : source at : hold st en 1 : I I source : source 2,300 - - - - 1 - 2,400 $ 6 $ 16 $ 10 $ 10 62.5% 100.0% 2,500 12 32 20 20 62.5 100.0 2,700 29 64 35 40 62.5 114.3 3,000 58 118 60 70 59.3 116.7 4,000 154 333 179 170 51.1 95.0 5,000 271 587 316 270 46.0 85.4 6,000 397 861 464 370 43.0 79.7 8,000 717 1,472 755 570 38.7 75.5 10,000 1,117 2,143 1,026 770 35.9 75.0 12.500 1,728 3,089 1,361 1,020 33.0 74.9 15,000 2,475 4,167 1,692 1,270 30.5 75.1 20,000 4,287 6,629 2,342 1,770 26.7 75.6 25,000 6,480 9,472 2,992 2,270 24.0 75.9 50,000 19,967 26,537 6,570 4,770 18.0 72.6 75.000 35,479 46,753 11,274 7,270 15.5 64.5 100,000 52,160 68,261 16,101 9,770 14.3 60.7 500,000 344,476 428,215 83,739 49,770 11.6 59.4 1,000,000 731,930 878,215 146,285 99,770 11.4 68.2 5,000,000 3,921,884 4,478,215 556,331 499,770 11.2 89.8 Treasury Department, Division of Tax Research February 28, 1942 I-II Revised-3 Regraded Unclassified L 88 Proposed corporation tax plan 1. Issues prefits tax Italso 20 change in the present excess profite credit but increase the rates of the excess profits tax by 15 percentage yoints. 2. Corporation normal and surtax rates & Corporations with net income under $25,000 Not income Normal tax Surbax * 0 - $ 5,000 15% 16% 5,000 - 20,000 17 16 20,000 - 25,000 19 16 b, Corporations with net income ever $25,000 Normal tax: Flat rate of 24 percent Bartax: Flat rate of 31 percent Relief provision: Corporations with current year surtez not income less than the average surtex net income of the base period years, 1936-1939, are allowed a tax credit of 10 percent of the difference, but not to exceed 20 percent of surbax not income, This relief provision does not apply to corporations under a above or e below. 0. Notch provision - Corporations with net incose slightly over $25,000 Normal tax: Continue 19 percent as bracket rate Burtax: $4,000 plus 60 percent of the excess over $25,000 Treasury Department Division of Tax Research March 2, 1942 Comparison of corporation tax plan under present law 89 and under the proposal : Present : : law : Proposal 1. Excess profits credit a. Invested capital method: First $5,000,000 of invested capital % Over $5,000,000 of invested capital 7 7 b. Income method: Portion of average earnings in base period, 1936-1939 95% 95% C. Specific exemption $5,000 $5,000 2. Excess profite tax rates Adjusted excess profits net income: First$20,000 35 50 $ 20,000 - 50,000 40 55 50,000 - 100,000 45 60 100,000 - 250,000 50 65 250,000 - 500,000 55 70 Over 500,000 60 75 3. Income tax a. Normal tax (1) Corporations with net income of not more than $25,000: First $5,000 15 15 $ 5,000 - 20,000 17 17 20,000 - 25,000 19 19 (2) Corporations with net income over $25,000: Flat rate 24 24 (3) Notch provision - corporationswith net income slightly over $25,000: First $5,000 15 15 $5,000 - 20,000 17 17 20,000 - 25,000 19 19 Over 25,000 37 19 b. Surtex (1) Corporations with net income of not more than $25,000: First $25,000 6 16 (2) Corporations with net income over $25,000: First $25,000 6 31 Over $25,000 7 31 (a) Relief provision: Corporations with current year surtax net income less than the average surtex net in- come for the base period years, 1936- 1939, are allowed a tax credit of 10% of the difference, but not to exceed 20% of surtex net income. This provi- sion applies only to corporations with net income over $25,000. (3) Notch provision - corporations with net income slightly over $25,000: First $25,000 6 16 Over $25,000 7 60 4. Post-war credit - Tax in excess of 50é of any doller of income Treasury Department, Division of Tax Research March 2, 1942 Regraded Unclassified (Amounts in thousands of dollars) I I - I 3 Great 1. I, du : American Colt's $ I $ Coos- : : : General Lakes Liggett - Items : : Gem L. Car and Patent Pont de I : Motors and Cola : : # : Fire Area Dredge : 1 Martin Foundry Nemours I : : and Dock 1 Myers : 1 Net income 2/ $6,984 $35,819 $4,242 $109,964 $347.250 $ 432 $27,043 $8,355 Excess profits not income 7,001 35,562 4,247 104,667 336,078 432 26,903 8.346 Excess profits credit and exemption 6,613 30,831 1,374 53,709 217,770 2,521 23,757 5.473 Excess profits tax 251 3,502 2,109 38,173 88,685 - 2,313 2,115 Normal tax base 6,733 32,317 2,134 71,792 258,565 432 24,730 6,240 Normal tax 1,616 7,756 512 17,230 62,056 104 5,935 1,498 Surtex base 6,733 32,317 2,134 71,792 258,565 432 24.730 6,240 Surtax, gross 2,087 10,018 661 22,255 80,155 134 7,666 1,934 Average base period surtax net income 799 23,819 1,246 64,472 237,175 1,575 25,193 2,530 Relief for decreased earnings - - - - - 86 46 - Surtex, net 2,087 10,018 661 22,255 80,155 48 7,604 1,934 Total tax 3,954 21,276 3,282 77.658 230,896 151 15,852 5,547 Effective rate (peroent) 56.6 59.4 77.4 70.6 66.5 35.0 58.6 66.4 Marginal rate (percent) 86.5 88.8 88.8 88.8 88.8 75.0 35.0 91.3 88.8 Excess profits credit method I.C. Inc. Inc. Inc. Inc. Inc. Inc. Inc. Treasury Department, Division of Tax Research March 2, 1942 Excess profits credit and normal tax rate as under present law; excess profits tax rates increased 15 percent in each bracket; surtax rate increased to flat rate of 31 percent; relief in form of tax credit of 10 percent of amount by which average surtex not income of base period exceeds current year surtex net income, but not more than 20 percent of surtax net income. Net income as reported for normal tax in 1940. Small amounts of taxable interest on government obligations disregarded for mirtax purposes. A higher marginal rate results for companies subject to excess profits tax and eligible for relief in the form of the tax credit. 90 CWA Regraded Unclass 91 M EFFECTIVE ESTATE TAX RATES Before Credit for State Death Taxes PERCENT PERCENT 90 90 80 80 70 70 60 60 50 50 Proposal Present Law 40 40 30 30 20 20 10 10 0 O 10 20 40 100 200 400 1,000 2,000 4,000 10,000 20,000 40,000 100,000 NET ESTATES BEFORE EXEMPTION IN THOUSANDS OF DOLLARS 92 the of the Security of the Trumy Dear Tax I Regraded Unclassified --E-revised 93 N 94 Comparison of estate tax rate schedule under present law and pronosal to increase the tax yield by approximately $250 million with $60,000 specific exemption, no exclusion for life insurance Net estate after: Bracket rate : specific exemo-: Present : : Total estate tax tion 1/ : law : Proposal : cumulative ($000) : # : Present law : Proposal Under $5 3% % $ 150 $ 400 5 - 10 7 12 500 1,000 10 - 15 11 15 1,050 1,750 15 - 20 11 15 1,600 2,650 20 - 30 14 22 3,000 4,850 30 - 40 18 26 4,800 7.450 40 - 50 22 30 7,000 10,450 50 - 60 25 33 9,500 13,750 60 - 70 28 36 12,300 17,350 70 - 100 28 40 20,700 29,350 100 - 150 30 44 35.700 51,350 150 - 200 30 46 50,700 74,350 200 - 250 30 48 65.700 98,350 250 - 300 32 50 81,700 123,350 300 - 350 32 52 97.700 149,350 350 - 400 32 54 113,700 176,350 400 - 450 32 56 129.700 204,350 450 - 500 32 58 145,700 233,350 500 - 600 35 60 180,700 293.350 600 - 700 35 62 215,700 355.350 700 - 800 35-37 64 251,700 419,350 800 - 900 37 66 288,700 485,350 900 - 1,000 37 68 325,700 553.350 1,000 - 1,500 39-42 70 526,200 903,350 1,500 - 2,000 45 72 753,200 1,263,350 2,000 - 2,500 49 75 998,200 1,638,350 2,500 - 3,000 53 76 1,263,200 2,018,350 3,000 - 4,000 56-59 78 1,838,200 2,798,350 4,000 - 5,000 63 79 2,468,200 3,588,350 5,000 - 6,000 67 80 3,138,200 4,368,350 6,000 - 7,000 70 80 3,838,200 5,188,350 7,000 - 8,000 73 80 4,568,200 5.986,350 8,000 - 9,000 76 so 5,328,200 6,788,350 9,000 - 10,000 76 80 6,088,200 7.588.350 10,000 and over 77 80 - - Treasury Department, Division of Tax Research February 19, 1942. 1/ A specific exemption of $40,000 and a. life insurance exclusion of $40,000 are allowed by the present law. The proposed law would allow B single specific exemption of $60,000 but no life insurance exclusion. Regraded Unclassified 95 = 96 Comparison of present and proposed estate taxes on net estates of selected sizes Net estate : Amount of tax : before : : Effective rate specific : : : : : : exemption; 2 = : Increase : : :Increase including = Present 3 Proposal : in : Present : $10,000 life: law : : tax : law Proposal :in of- : :fective insurance 1/ : : : : : : rates ($000) : : : : : : $ 60 $ 500 - $ -500 .8% - -.8% 70 1,600 $ 1,000 -600 2.3 1.4% -.9 90 4,800 4,850 50 5.3 5.4 .1 100 7,000 7,450 950 7.0 7-5 .5 150 20,700 25,350 4,650 13.8 16.9 3.1 200 35,700 46,950 11,250 17.9 23.5 5.6 400 97,700 144,150 46,450 24.4 36.0 11.6 600 163,200 257,350 94,150 27.2 42.9 15.7 800 233,200 380,950 147,750 29.2 47.6 18.4 1,000 307,200 512,550 205,350 30.7 51.3 20.6 2,000 730,700 1,220,150 489,450 36.5 61.0 24.5 4,000 1,808,700 2,751,550 942,850 45.2 68.8 23.6 6,000 3,104,700 4,340,350 1,235,650 51.7 72.3 20.6 10,000 6,050,200 7,540,350 1,490,150 60.5 75.4 14.9 20,000 13,749,700 15,540,350 1,790,650 68.7 77.7 9.0 40,000 29,149,700 31,540,350 2,390,650 72.9 78.9 6.0 Treasury Department, Division of Tax Research February 19, 1942 1/ It is assumed that all of the insurance would have been excluded under the present act. The proposal would allow & single specific exemption of $60,000 but no life insurance exclusion. E-3- Revised Regraded Unclassified Regraded Unclassified Emise Tax rroposals : # : Britisted : Article I Present tex Recommended tax I increases 1 : rate and base I in revenues 1 : I (In millions) 1. Photographic apparetus 10% manufacturers' 25% manifacturers' sales price # 11.2 sales price 2. Transportation by pipe line 4 of amount paid 10% of amount paid 18.7 3. Communications: a Telephone toll service 24-50/- tax 5/: 25/0 to 39/ 50 tax ) 24.5 additional 5/ tax 40/= 646 10/ - ..... ) on each 50/= 656 99/- 15/ . ) 5/2 additional tax for each o 25/- or fraction thereof ) ) b. Telegraph, cable 10% of charge 15% of charge ) c. leased wires, etc. ) 10% of charge 15% of charge ) d. Local telephone bill 6% of bill 10% of bill 46.6 a. Coin-operated telephone Exempt 10% of service charge under 35/ 6.7 4. Gasoline 136 per gal. 36 per gal. 242.2 98 5. Lubricating ail 416 per gal. 10/= per gal. 49+9 6. Beer $6 per bbl. $8 per bb1. 117.1 7. Wines: Still wines ) Not more than 14% alcohol 86 per gal. 15/ per gal. ) 14-21% alcohol 30/- per gal. 50% per gal. ) More than 21% 65% per gal. 100 per gal. ) 25.0 Sparkling wines 7/ per half-pint 100 per half-pint ) Artificial carbonated wines 34 per half-pint 50 per half-pint Liqueurs, cordials, etc. 32F per half-pint 5/ per half-pint 8. Distilled spirite $4 per gal. $6 por 8a. 279.7 9. Transportation of persons 5% of amount paid 15% on transportation; 94.8 20% on seats and berths 10. Carbonated soft drinks None a. Schedule for bottled dr. rks 146.9 based on 1/ per bottle No- tailing at not more than 10/0; b. 80/- per 1b. of carbonic acid gas used in unbottled drinks 11. Cendy and chewing gum None 15% manufacturers' sales price 45.5 12. Cigars Rate schedule New schedule 2/ 13.1 13. Smoking tobacco 18/ per 1b. 366 per 1b. 26.8 14. Cigarettes $3.25 per M. $3.50 per M - 10-cent brands; 188.6 $4.00 per M - 15-cent brands 15. Cigarette papers and tubes No examption: tax all papers and 7.8 Schedule tubes 1/2/ per 25 papers or tubes $1,344.9 Total Estimated full year effect of indicated excises at estimated fiscal year 1943 levels of business after allowing for the initial impact of the imposition of the sugmented rates. Class A, retail price 2-50, tax $2.50 M3 B, 56, tax $5.00 M; c, 5.1-8%, tax $7.50 M; D, 8.1-10#, tax $10.00 MJ 1, 10.1-156, tax $15.00 M; T, 15.1-00,6, tax $20.00 MI G, 20.1-30%, tax $25.00 Ms E, 30.1 and ever, tax $40.00 Me 99 i it al Comparism of individual Locome fax reles, - and credita under present and proposed United Males les and under Line of Canada and Great Britain United Nates United States - Canada : Great Britain # present lew i proposal I present law 1/ present Las 2/ formal to 0 a 15% em first $1,000 in MEDICA of 50% exemptions to 85% - net income returned rate of 32/5 - first selso in excess of $500,000 Barter release Minimum rate $ 12% 10% Mariaus rate 77th Bed 47.9% Vinime rate applies to 12,000 R , SD - - $500 $8,000 - $10,000 Maximo rate applica se Orer $5,000,000 Dra $100,000 Over $80,000 Personal emergtions and credit for decembents 3/ Single person $ 750 # 750 $ 750 $320 Married person 1,500 1,500 1,500 560 Zech dependent 400 400 400 200 Earned Locome credit 10%, and $1,400 -- - 10%, maximum $600 Special Income National Defence tax -- For single persons (collected of 5% of par income u over Béno per year and not in FEDER of $1,700 par year or 7% if gross income exceeda $1,200 per year. For surried person: § 5% of gross Locose if over $1,200 per year with a. les credit of $70 for each dependent. Maries - investment income - as ou - to excess of $1,500 - personal creation end credit for dependents if in of $1,500 Postemal credit - - The difference between the - (as above reves) computed - the basis of (a) price la personal complimes - credite and (b) the proced extreptions and crudite 5/ Treasury Departments, Division of for Senearch Telenuary 27. 1942 100 Income Yor has at of 1941. 2/ British Fleance Aot (No. 2) of 1940 and Finance Act of 1941. Pound converted at Id. 3/ la the DUM of Greek Britain, personal esseption and credit for dependents - allowed for serval les purposes mig. Is - come shall the far refune the income of a. single person below $660 or If morried below $1,700. 5/ The credit La limited M follows: (a) all entred Income 160 ($740) for stagle person wind 18 ($750) for a service person; (b) all Investment income, 110 (Mo) for a single person and 135 (60) for . acrived persons. Regraded Unclassified 101 Compartion of Individual who rele union present ml proposal Balted Blains im, and under the Jame of Genala ml less Britals Orited States, present I United States, proposal: Canada, procest (Insom # Not trease Age, 1941) (Schalute H. 20th 11 fat 2u Ash 199) 2/ Grest Britals, present classes 1/ I Total I Total (Please (an. Art. 1940) # Total Net income ($000) 1 warkez Rate I Sale arter Total - las Date classes 1/ # cumplative subjective are registive ($000) 3/ o - -5 % # 30 18 @ to 15% 6 75 - - 1 6 3 15 135 - 15 0 - 150 -5 - 1 - 1.5 6 90 18 a - 20 250 -5 1 - 1.5 2 6 180 20 355 - 20 1 - 350 1.5 - 7 - , , no 22 5% - 3 600 1.5 2 - - 2 - 3 3 , 4 9 300 % 705 30 900 - en - 5 13 430 27 1,055 - 33 2 - " on 1,230 - . 13 560 27 1.325 - 36 - as 1,590 5 - + 7 17 730 30 - 1,625 34 - mu - and 1,970 1 - 5 17 900 R - 1,925 9 - 2,370 7 - # 7 6 # - 9 21 1,100 34 2,255 42 2,790 10 9 zi 34 $ # 1,320 100 10 2,605 lake 6 - 9 - 3,230 10 10 . 12 10 1,620 34 200 3.365 by 9 - 10 4,170 - 14 2,400 11.25 12 29 42 425 4,305 47 10 - 12 5,110 16.25 14 - 15 32 2,720 $ 4,655 750 by 12 - 14 5.500 16.25 913 14 . 15 15 - 16 32 3,040 45 5,105 X 6,080 16 - 18 35 3,7%0 En 16.25 6,065 1,075 15 - 16 50 7,040 21.25 is - R 38 4,500 51 1,500 16 7,045 - 15 50 E,OSO 21.25 20 22 E 5,320 5% 18 - 8,165 1,925 as - 53 9,140 - £ tale K 22 6,200 2,425 57 20 - 22 9.305 53 10,200 a 2,925 22 - * % - 26 - 7,000 57 10,445 53 11,260 26.75 of 47 3,500 30 8,960 24 60 % , 12,845 53 13,380 26.75 60 4,650 30 - 47 % 32 9,900 - 14,045 14,480 32 38 50 12,900 & 26.75 5,225 **** 30 55 30 - 32 - 17,885 55 - to 17,780 35 38 53 7,325 - 13,960 M 19,245 55 18,880 35 8,025 & - to - We 53 16,080 66 21,965 57 21,160 " 41.25 50 9.675 . 55 19,380 72 26,285 57 24,560 41.25 12,150 We 50 91882 50 . 8 57 25,080 75 33,00) 59 60 30,400 41.25 16,275 50 TO - 8 - DU 59 30,980 78 41,685 59 36,380 45 70 20.775 8 - 61 TO . 75 34,030 50 45,605 12322 59 39.330 & 23,025 TO - 75 75 . 50 61 37,080 no 49,685 63 42,480 5 80 25,275 90 63 75 - so . 43,380 62 57.00 63 48,760 47.50 30,025 80 - 90 - 100 64 8 49,780 a 66,285 63 55,080 47.50 100 - 150 34.775 90 - 100 65 62,260 #6 109,285 67 68,580 47.50 150 - 200 58,525 100 - 150 66 115,280 46 152,205 70 123,580 47.50 82,275 150 - 200 200 - 250 67 148,780 86 195,205 75 161,060 47.50 106,025 200 - 250 250 - 300 69 163,280 #6 238,205 75 198,580 47.50 129,775 250 - 300 300 - 400 71 254,280 86 324,285 80 278,580 47.50 X 177,275 300 - lico - 500 72 326,200 66 410,285 60 354.580 47.50 224,775 NOO - 500 500 - 750 73 508,780 66 625,285 65 571,080 47.50 343.525 500 - 750 750 1,000 74 693.780 66 $40,285 65 763,500 47.50 462,775 750 1,000 1,000 - 2,000 75 1,443,780 66 1,700,265 65 1,633,540 47.50 937.275 1,000 - 2,000 2,000 - 5,000 7€ 3,723,780 86 4,280,205 #5 4,183,580 47.50 Over 2,362,275 2,000 - 5,000 5,000 77 - 55 . 3 - 47.50 - Over 5,000 Treasury Department. Division of Tax Besourch February 27. 1942 1/ For the United States and Canadian lass, net facess after personal examption ml credits for dependants: for Great Britels, net Income before personal examption and credit for dependents. 2/ rates are the basic rates applicable to individual bet Income in extens of personal exemption and credit for dependents. In addition to the above retes there La also imposed a suries of la percent - investment Income applicable to wuth Income In excess of $1.500 (or the - of a taxpayer's normal exemption if higher then $1,500). y Pront converted at 4. 102 INDIVIDUAL INCOME TAX Comparison of individual Income temps under present el propred United States Law and under the 20ml of Gener & and Great Tritida Ringle Person - Be Dependente T United States I $ Great Britain 1 Income United States If Canada before present Law I proposal I procest Low The Income before personal (1-) Bovined-3) I present 1.00 5 includes post- : # 1 - var credit) parsonal exemption I Amount of diffective Amount of (Effective Amount of diffective Amount of diffective examption 1/ : tax # rate 4 tax I rate I laz I rate I toz # rate 2/ I 800 $ 3 . ¥ $ I 1,0% I less 6.0% 0 130 16.35 # 800 900 11 1,2 24 2+7 65 7.6 159 17.7 900 1,000 21 2.3 to 4.0 88 6,8 189 18.9 1,000 1,100 31 2,5 56 5.1 106 5.8 220 2020 1,100 1,200 NO 3+3 72 6.0 128 10.7 265 22,1 1,200 1,500 $ 4.6 125 0.5 216 14.5 400 26.7 1,500 1,600 79 4.9 247 9.2 240 15.0 445 27.5 1,600 2,000 117 5+9 230 11.5 340 17.0 625 31.3 2,000 2,500 165 6,6 345 13.6 475 19.0 850 34.0 2,500 3,000 221 7+4 470 15.7 623 20.8 1,075 35.8 3,000 4,000 347 6.7 735 18.4 955 23.9 1,525 38.1 4,000 5,000 483 9.7 1,023 20.5 1,333 20+7 1,975 39.5 5,000 6,000 649 10.6 1.333 22.2 1,740 29.0 2,425 40.4 6,000 8,000 1,031 12.9 1,990 24.9 2,630 32.9 3,425 42.0 5,000 10,000 1,493 14.9 2,720 27.2 3,600 36.0 4,625 46.3 10,000 12,500 2,178 17.4 3.7% 29.9 4,928 39.4 6,181 49.4 12,500 15,000 2,994 20,0 4,865 32.6 6,278 41.9 7,637 52.2 15,000 20,000 4,929 24.6 7,473 37.4 9,105 45.5 11,350 56.8 20,000 25,000 7,224 28.9 10,418 41.7 12,053 48.3 15,137 60,5 25,000 50,000 20,552 41.5 27,715 55.4 28,393 56.8 36.575 73.2 50,000 75,000 36,487 18.6 48,055 64.1 15,878 61.2 59.950 79.9 75,000 100,000 53,214 53+2 69,625 69.6 64,340 64.3 $4,200 84.2 100,000 500,000 345,654 69.1 429,610 65+9 411,720 82.3 474,200 94.8 500,000 1,000,000 733,139 73+3 $79,610 68,0 091,683 09.2 961,700 96.2 1,000,000 $,000,000 3,923,124 78.5 4,479,610 89.6 4,731,683 94.6 4,861,700 97.2 5,000,000 easury Department, Division of Tax Research February 28, 1942 In calculating the taxes under present United States and British Les maximum earned Income Le assumed. No earned income credit Le allowed under the United States proposal. In the Canadian calculations all income to 020060 of $30,000 10 esemed to be investment income, Includes national defense tax and surtax 00 investment income. Unlike the United States and Currellan, British personal exemptions and credit for dependents are allowed for normal tax purposes only. Found converted no $4. Regraded Unclassified 103 INDIVIDUAL INCOME TAX Comparison of individual iscone taxes under proqent and proposed United States Law and under the laws of Canada and Great Britain Married person - no dependents I I I 1 Great Britain 3/ 1 Set income I United States 1 United States # Canada 2/ # present law 1Net income before I present law tproposal (L-B Revised: present less (includes post-var 1 before personal 1 1 -3) I . credit) I personal exemption tânount of:RffectivetAmcunt of:Effective lAmount of:EffectivetAmount of:Effectivesexemption 1/ I tax # rate I tax # rate I tax I rate = tax I rate I 1/ 1,500 - - - - 6 75 5.0% $ 250 15.7% 8 1,500 1,600 6 .46 16 1.0% 95 5.9 325 20.3 1,600 1,700 13 .8 32 1.9 115 6.8 370 21,8 1,700 1,800 23 1,3 48 2.7 135 7.5 415 23.1 1,800 1,900 32 1.7 64 3.4 155 8.2 460 24.2 1,900 2,000 42 2,1 so 4.0 175 8,8 505 25,3 2,000 2,100 52 2.5 99 4.7 195 9.3 550 26,2 2,100 2,200 61 2.8 118 5.4 215 9.8 595 27.0 2,200 2,300 71 3.1 137 6.0 235 10.2 640 27.8 2,300 2,400 80 3.3 156 6.5 255 10,6 685 28,5 2,400 2,500 90 3.6 175 7.0 275 11.0 730 29,2 2,500 3,000 138 4,6 285 9.5 400 13.3 955 31.8 3,000 4,000 249 6,2 535 13.4 675 16.9 1,405 35.1 4,000 5,000 375 7.5 805 16.1 1,000 20,0 1,855 37.1 5,000 6,000 521 8.7 1,100 18.3 1,365 22.8 2,305 38.4 6,000 8,000 873 10.9 1,735 21.7 2,180 27.3 3.305 41.3 8,000 10,000 1,305 13,1 2,435 24.4 3,080 30.8 4,505 45.1 10,000 12,500 1,960 15.7 3,425 27.4 4,325 34.6 6,061 48.5 12,500 15,000 2.739 18,3 4,535 30.2 5,625 37.5 7,717 51.4 15,000 20,000 4,614 23.1 7,060 35.3 8,330 41.7 11,230 56.2 20,000 25,000 6,864 27.5 9,960 39.8 11,185 44.7 15,017 60.1 25,000 50,000 20,439 40.9 27,145 54.3 26,965 53.9 36,455 72.9 50,000 75,000 35,999 45.0 47,425 63.2 43,935 58.6 59.830 79.8 75,000 100,000 52,704 52.7 68,965 69.0 61,875 61.9 84,080 84.1 100,000 94.8 500,000 500,000 345,084 69.0 428,935 85.8 401,120 80.2 474,080 1,000,000 732,554 73.3 878,935 87.9 871,045 87.1 961,580 96.2 1,000,000 5,000,000 3,922,524 78.5 4,478,935 89.6 4,631,045 92.6 4,861,580 97.2 5,000,000 treasury Department, Division of Tax Research February 28, 1942. 1t. calculating to Live under present United Stat and British law maximum carned income is nonemed. No earned incous credit is allowed under the United states proposal. In the Canadian calculations all In- come in excess of $30,000 is assumed to be investment income. Includes national defense tax and surtay on investment income. Unlike the United States and Canadian, British parsonal exemption and credit for dependente are allowed for normal tax purposes only, Pound converted et $4. Regraded Unclassified 104 Individual Income Tax Comparison of individual income taxes under present and proposed United States Law and under the laws of Omada and Great Britain Married person - Two dependents Net income : # # 1 Great Britain tNet income before I United States 1 United States # I I I Canada 2/ present law I before personal : present lew proposal 1 (includes post- :personal exemption & : I (I-Z Revined-3) I I was rexemption & dependent : Amount of:Effective Amount :Effect- I Amount :Effect- : Amount Inffect- : dependent credit 1/ 1 tax 1 rate I of tax give rate: of tax tive rate: of tax sive rate: credit 1/ $ 2,300 - - - - $ 75 3.3% $ Willo 19.16 $ 2,300 2,400 $ 6 .3% $ 16 .7% 95 4.0 485 20.2 2,400 2,500 12 -5 32 1.3 115 4.6 530 21.2 2,500 2,700 29 1.1 64 2.4 155 5-7 620 23.0 2,700 3,000 58 1.9 118 3.9 215 7.2 755 25.2 3,000 4,000 154 3.9 333 8.3 450 11.3 1,205 30.1 4,000 5,000 271 5.4 587 11.7 735 14.7 1,655 33.1 5,000 6,000 397 6.6 861 14.4 1,070 17.6 2,105 35.1 6,000 8,000 717 9.0 1,472 18.4 1,842 23.0 3,105 38.8 8,000 10,000 1,117 11.2 2,143 21.4 2,710 27.1 4,305 43.1 10,000 12,500 1,728 13.8 3,089 24.7 3,909 31.3 5,861 46.9 12,500 15,000 2,475 16.5 4,167 27.6 5,209 3407 7,517 50.1 15,000 20,000 4,287 21.4 6,629 33.1 7,890 39.5 11,030 55.2 20,000 25,000 6,480 25.9 9,472 37.9 10,721 42.9 14,817 59.3 25,000 50,000 19,967 39.9 26,537 53.1 26,437 52+9 36,255 72.5 50,000 75,000 35,479 47.3 46,753 62.3 43,391 57.9 59,630 79.5 75,000 100,000 52,160 52.2 68,261 68.3 61,299 61.3 83,880 83.9 100,000 500,000 344,476 68.9 428,215 55.6 400,408 80.1 473,880 94.8 500,000 1,000,000 731,930 73.2 878,215 67.8 870,293 87.0 961,380 96.1 1,000,000 5,000,000 3,921,884 78.4 4,478,215 89.6 4,630,293 92.6 4,861,380 97.2 5,000,000 Treasury Department, Division of Tax Research February 28, 1942 1/ In calculating the taxes under present United States and British law maximum earned income is assumed. No earned income credit is allowed under the United States proposal. In the Canadian calculations all income in excess of $30,000 is assumed to be investment income. 2/ Includes national defense tax and surtex on investment income. 3/ Unlika the United States and Ganadian, British personal exemption and credit for dependents are allowed for normal tax purposes only. Pound converted at $4.00. Regraded Unclassified 105 British and Canadian corporation income and excess profits taxes. British corporations are subject to the income tax and either the National Defence Contribution or the excess profits tax, whichever is greater. The income tax rate is 50 percent on net income (after excess profits tax or National Defence Contribution.) The corporation income tax rate is the same as the standard rate applicable to individuals. Corporations may reimburse themselves for the income tax when distributing earnings to shareholders. Corporations are, therefore, merely the withholding agents with respect to the standard rate of 50 percent on dividends. The National Defence Contribution rate is 5 percent on net income (before deduction of income tax and excess profite tax). The excess profits tax rate is 100 percent on profits (before income tax and National Defence Contribution) which exceed the profits for 1935. 1936, the average of 1935 and 1937 or the average of 1936 and 1937. Under the Finance Act of 1941, 20 percent of the net amount of excess profits tax paid by every concern (after deducting any repayment on ac- count of deficiencies) is treated as a credit to be refunded to the tax- payer after the war at such date as Parliament may determine. Canadian corporations are subject to an income tax of 18 percent (20 percent for corporations filing consolidated returns) and an excess profits tax. The excess profits tax rate 18 75 percent on profits in excess of average profits for 1936-1939 (after deduction of income tax thereon) or 22 percent on current year net income (before deduction of income tax thereon) whichever results in the greater tax. Businesses with profits of $5,000 or less, before shareholders' or partners' and proprietors' salaries, drawings or other payments are exampt from the excess profits tax, The income and excess profits tax rates applicable to corporations in the United States under present and proposed Federal law and under the British and Canadian laws are shown in the following table: Regraded Unclassified 106 Comparison of corporation Income and 980045 profite tax rates in the United States. Urnet Extrain and canale. 1 United States (Fetaral) Grant Britcle Canada 5 Present 2ml I Proposal Income tax 32% 2/ 55% 2/ 50% 21 10% (now (for corporations with normal for tax not incose of sore than filing consbil- $25,000) dated returne) Minimum under excess profits tax 3 22 Total income tax 32% 55% zj 55% 3/ 40% Excess profits tax 35% - 60% wj 505- 75% wf 100% of 75% of excess profise 5/ or profite 67 5 parcent of or 22% of not not income incoss reside- whichever in 0702 is groater. greater. Post-war credit Tax in edition 20% of the net CODO of 806 amount of die on any 002- CODE profite lar of 104 Box paid come U 5/ 1/ Includes 245 normal tax and surtex of 7% Includes 24% normal tax and surtax of 32% If current year surtax net income 18 lose than the average surtex net income of the base period years 1936-1939, a tax credit equal to 10% of the difference is allowed. The credit in limited to a maximus of 20$ of current year ourtax not 100 come, 3/ The corporation may reinburse itself for the laz when distributing earnings to shareholders. The corporation, therefore, in sersly the withholding agens with respect to the standard rate of 50% on dividends. 4/ The excess profits tax 1a deposed at graduated rates on excess profite net income in excess of (w) a credit of 95% of the sverage versings for 1936 - 1939 or 85 on the first $5,000.000 of invosted enpital made 7% EYES the balance, whichever is greater, and (b) = specific exemption of $5,000, 5/ The excess profite tax is imposed on the excess of profite of the taxable year over profits for 1935. 1936, the average of 1935 and 1937 or the average of 1936 and 1937- 6/ The excess profise tax 14 imposed on 9XC000 profite set Income is excess of the average profits for 1936-1939. 107 - 3 - I/ Such amounts are to be held by the Government to the account of the corporation and be returnable within a limited period after the war, in those cases where it is spent for new and additional capital equipment or otherwise is spent in the additional employment of labor. 8/ After deducting any repayment on account of deficiencies. The amount of the credit is to be refunded to the taxpayer after the war at such date as Parliament may determine. Treasury Department February 27, 1942. Division of Tax Research Amount and percent of corporation profits reacining after 108 individual income tax and corporate income and excess profits taxes in the United States under present Inv and under proposed 1942 plan, and in Great Britain and Cannda I. Amount of corporation profits remaining after individual income tax and corporate income and excess profits taxes : Shareholder's income from other sources : None : $5,000 : $10,000 : $50,000 : $100,000 United States, present lew $841 $718 $631 $345 $269 United States, ro osal 2/ 512 358 317 123 61 Great Britain 3/ 500 500 387 87 25 Canada 900 537 433 306 252 II. Percent of corporation profite remaining after individual income tax and corporate income and excess profits taxes : Shareholder's income from other sources : None : $5,000 : $10,000 : $50,000 : $100,000 United States, present law 56.1% 47.95 42.15 23.0% 17.9% United States, provosal 2/ 34.1 24.5 21.1 8.2 4.1 Grent Britsin 33.3 33.3 25.8 5.8 1.7 Canada 60.0 35.8 28.9 20.4 16.8 Treasury Department, Division of Tex Research March 2, 1942 1/ 3asis of commitation: It 16 assumed that the corporation has current year profits of $1,500,000 and average base year earn- inge of $1,000,000; that the concent of income 1ª the serve in the United States, Great Britain and Conde: that the corors- tion's excess profite credit is determined on the basis of Average earnings during the tase period: that the corporation distributed all of its profits after trutes and that the share- holder in the examples the n. 1/10 of 1% equity in the income of the corporation. Present law, Revenue Act of 1941: proposal, 10r indivi/pal income tax surtex Schedule I-E, revised-?. is substituted for present schodule and the cornol income credit is eliminated; on? for corporations, excess profits credit same F.B under pres- ent law, rates increased by 15 percentage nointe and surtex rate increased to flat rate of 31%. Finance Act of 1941. Income War Tax Act of 1941. Unclassified Comparison of the interlocking effects 01 he individual income tax and corporation income and excess profits taxes in the United States under present law and under the proposed 1942 plan, with British and Canadian systems :Shareholder with no income from other sources : United States : = British Canadian : Present : Proposal = : law 2/ 3/ 4/ : 5/ : : : 1. Amount of share in corporation profits before corporation taxes 6/ 1,500 1,500 1,500 1,500 2. Total corporation income and excess profits tax on share 659 988 1,000 600 3. Amount available for distribution by corporation to shareholder I/ (1-2) 841 512 500 900 4. Individual income tax on share of profits received from corporation - I - 1 5. Total tax on share of corporation profits (2+4) 659 988 1,000 600 6. Amount of profits remaining after corporation and individual taxes (1-5) 841 512 500 900 7. Profits after taxes as a percent of profits before taxes (641) 56.1% 34.1% 33.3% 60.0% Treasury Department, Division of Tax Research February 27, 1942. 1/ Basis of computation: It 10 assumed that the corporation has current year profite of $1,500,000 and average base year earnings of $1,000,000; that the concept of income is the same in the United States, Great Britain and Canada: that the corporation's excess profite credit is determined on the basis of average earnings during the base period; that the corporation distributes all of its profits after taxes and that the shareholder in the 03- amples has a 1/10 of 1% equity in the income of the corporation. Revenue Act of 1941. Proposals: For corporations, excess profite credit as under present law, excess profits rates increased by 15 percentage points, normal tax as under present law, surtax rate increased to A flat rate of 313; for individuals surtax Schedule I-B, rev. 3. substituted for present 109 schedule and the earned income credit eliminated. Finance Act of 1941. The corporation excess profits tax is before post-war credit and the amount of individual income tax on share of profits from corporation is the surtex only. The standard rate is withheld at source by corporations. Income Var Tax Act of 1941. 61 Assumed to be 0.1% of current year earnings of corporation. Assuming full distribution of profits, Regraded Unclassifi Comparison of the interlocking effects of the Individual income tax and corporation income and excess profite taxes in the United States under present law and under the proposed 1942 plan, with British and Canadian systems : Shareholder with $5,000 from other sources : United States : British Canadian : Present : Proposal : : : law 2/ : 3/ : 4/ 5/ 1. Amount of share in corporation profits before corporation taxes 6/ 1,500 1,500 1,500 1,500 2. Total corporation income and excess profits tax on share 659 988 1,000 600 3. Amount available for distribution by corporation to shareholder I/ (1-2) 841 512 500 900 4. Individual income tax on share of profits received from corporation 123 144 - 363 5. Total tax on share of corporation profits (2+4) 782 1,132 1,000 963 6. Amount of profits remaining after corporation and individual taxes (1-5) 718 368 500 537 7- Profits after taxes as a percent of profits before taxes (6:1) 47.9% 24.5% 33.3% 35.8% Treasury Department, Division of Tax Research February 27. 1942. 1/ Basis of computation: It is assumed that the corporation has current year profite of $1,500,000 and average base year earnings of $1,000,000; that the concept of income is the same in the United States, Great Britain and Canada; that the corporation's excess profits credit in determined on the basis of average earnings during the base period; that the corporation distributes all of its profits after taxes and that the shareholder in the 62- amples has a 1/10 of 18 equity in the income of the corporation. MM Revenue Act of 1941. Proposals: For corporations, excess profits credit as under present law, excess profits rates increased by 15 percentage points, normal tax as under present lav, surtax rate increased to a flat rate of 31%; for individuals surtax Schedule I-E, rev. 3. substituted for present schedule and the earned income credit eliminated, Finance Act of 1941. The corporation excess profits tax is before post-war credit and the amount of individual income tax on share of profits from corporation is the surtax only. The standard rate is withheld at source by corporations, 110 5/ Income War Tax Act of 1941. Assumed to be 0.1% of current year earnings of corporation. Assuming full distribution of profits. Regraded Unclassifie Comparison of the interlocking effects of une individual income tax and corporation income and excess profits taxes in the United States under present law and under the proposed 1942 plan, with British and Canadian systems :Shareholder with $10,000 from other sources : United States : : British Canadian : Present = Proposal : : law 2/ 3/ 4/ : : : : 5/ 1. Amount of share in corporation profits before corporation taxes 6/ 1,500 1,500 1,500 1,500 2. Total corporation income and excess profits tax on share 659 988 1,000 600 3. Amount available for distribution by corporation to shareholder I/ (1-2) 841 512 500 900 4. Individual income tax on share of profits received from corporation 210 195 113 467 5. Total tax on share of corporation profits (2+4) 869 1,183 1,113 1,067 6. Amount of profits remaining after corporation and individual taxes (1-5) 631 317 387 433 7. Profits after taxes as a percent of profits before taxes (6:1) 42.1% 21.1$ 25.8% 28.9% Treasury Department, Division of Tax Research February 27, 1942. 2/ Basis of computation: It is assumed that the corporation has current year profits of $1,500,000 and average base year earnings of $1,000,000; that the concept of income 18 the same in the United States, Great Britain and Canada; that the corporation's excess profits credit is determined on the basis of average earnings during the base period; that the corporation distributes all of its profits after taxes and that the shareholder in the 02- amples has a 1/10 of 15 equity in the income of the corporation. Revenue Act of 1941. 3/ Proposals: For corporations, excess profits credit as under present law, excess profite rates increased by 15 percentage points, normal tax as under present law, surtax rate increased to a flat rate of 31%; for individuals surtax Schedule I-E, rev. 3, substituted for present schedule and the earned income credit eliminated. Finance Act of 1941. The corporation excess profits tax 10 before post-war credit and the amount of individual income tax on share of profite from corporation is the surtax only. The standard rate is withheld at source by corporations. Income War Tax Act of 1941. 111 Assumed to be 0.15 of current year earnings of corporation. Assusing full distribution of profits. Regraded Unclassifie Comparison of the interlocking effects of the adividual income Lax and tion income and excess profite taxes in the United States under present lav and under the proposed 1942 plan, with British and Cansuian systems in : Shareholder with $50,000 from other sources : United States : : British Canedian : Present : Proposal : : : law 2/ 3/ 7/ 5/ : : : 1. Amount of share in corporation profits before corporation taxes 6/ 1,500 1,500 1,500 1,500 2. Total corporation income and excess profits tax on share 659 988 1,000 600 3. Amount available for distribution by corporation to shareholder I/ (1 - 2) 841 512 500 900 4. Individual income tax on share of profits received from corporation 496 389 413 594 5. Total tax on share of corporation profits (2 + 4) 1,155 1,377 1,413 1,194 6. Amount of profits remaining after corporation and individual taxes (2 - 5) 345 123 87 306 7. Profits after taxes as 8 percent of profits before taxes (6 + 1) 23.0% 8.2% 5.8% 20.45 Treasury Department, Division of Tax Research March 2, 1942 1/ Basis of computation: It is assumed that the corporation has current year profite of $1,500,000 and average base year earnings of $1,000,000; that the concept of income is the same in the United States, Great Britain and Canada; that the corporation's excess profits credit is determined on the basis of average earnings during the base period; that the corporation distributes all of its profits after taxes and that the shareholder in the examples has a 1/10 of 1% equity in the income of the corporation. Revenue Act of 1941. Proposals: For corporations, excess profits credit as under present law, excess profits rates increased by 15 percentage points, normal tax as under present law, surtax rate increased to a flat rate of 31%; for individuals, surtax Schedule I-E, revised-3, substituted for present schedule and the earned income credit eliminated. Finance Act of 1941. The corporation excess profits tax is before post-war credit and the amount of individual income tax on share of profits from corporation is the surtax only. The 112 standard rate 18 withheld at source by corporations. 5/ Income Var Tax Act of 1941. Assumed to be 0.1% of current year earnings of corporation. Assuming full distribution of profits. Regraded Unclassified Commarison of the interlocking effects of the individual income tax and corporation income end excess profite taxes in the United States under present lew and under the proposed 1942 plan, with British and Canadian systems 1/ # Shareholder with $100,000 from other sources : United States : : British : Present Canadian : Proposal : : : law 2/ : 3/ : 4/ : 5/ 1. Amount of share in corporation profits before corporation taxes 6/ 1,500 1,500 1,500 1,500 2. Total corporation income and excess profits tex on share 659 988 1,000 600 3. Amount available for distribution by corporation to shareholder I/ (1 - 2) 841 512 500 900 4. Individual income tex on share of profits received from corporation 572 451 475 648 5. Total tex on share of cornoration profits (2 + 4) 1,231 1,439 1,475 1,248 6. Amount of profits remaining after corpora- tion and individual taxes (1 - 5) 269 61 25 252 7. Profits after taxes as a percent of profits before taxes (6 + 1) 17.9% 4.15 1.7% 16.8% Treasury Department, Division of Tax Research March 2, 1942 Basis of commutation: It is assumed that the corporation has current year profits of $1,500,000 and average base year earnings of $1,000,000; that the concept of income is the same in the United States, Great Britain and Canada; that the corporation's excess profits credit 1s determined on the basis of average earnings during the base period; that the corporation distributes all of its profits after taxes and that the shareholder in the examples has a 1/10 of is equity in the income of the comporation. Revenue Act of 1941. Proposals: For corporations, excess profits credit as under present law, excess profits rates increased by 15 percentage points, normal tax as under present law, mrtax rate in- cressed to a flat rate of 31%: for individuals, surtax Schedule I-E, revised 3, substi- tuted for present schedule and the earned income credit eliminated. 4/ Finance Act of 1941. The corporation excess profite tax is before nost-war credit and the amount of individual income tax on share of profite from cornoration is the surtax only. 113 The standard rate is withheld at source by corporations. Income Var Tax Act of 1941. Assumed to be 0.1% of current year earnings of corporation. Assuming full distribution of profits. Regraded Unclassifie Estate tax liability under present and proposed United States laws and under present British and Canadian laws, for net estates (before exemption but including $10,000 insurance) of selected sizes Net estate : : Amount of tax Effective rate, percent before specific: : exemption : : : : : : United States 3/ Great United States Great including : : : Canada : : : Canada Britain Britain $10,000 life : Present : : : Proposal 5/ Present : # 5/ insurance 2/ law : 4/ Proposal : : : : law : 4/ : : $ 10,000 - - $ 300 6/ - - 3.0% 6/ 20,000 - - 800 6/ . - 4.0 6/ 30,000 - - 1,200 $ 574 - - 4.0 1.9% 40,000 - - 2,400 992 - - 6.0 2.5 50,000 - - 3,600 1,546 - - 7.2 3.1 60,000 $ 500 - 5,040 2,173 .8% - 8.4 3.6 70,000 1,600 $ 1,000 5,880 2,831 2.3 1.4% 8.4 4.0 80,000 3,000 2,650 7,680 3,564 3.8 3.3 9.6 4.5 90,000 4,800 4,850 9,720 4,367 5-3 5.4 10.8 4.9 100,000 7,000 7,450 12,000 5,246 7.0 7-5 12.0 5.2 150,000 20,700 25,350 21,600 10,856 13.8 16.9 14.4 7.2 200,000 35,700 46,950 39,000 17,201 17.9 23.5 19.5 8.8 400,000 97,700 144,150 104,000 51,391 24.4 36.0 26.0 12.8 600,000 163,200 257,350 187,200 88,441 27.2 42.9 31.2 14.7 800,000 233,200 380,950 270,400 129,531 29.2 47.6 33.8 16.2 1,000,000 307,200 512,550 364,000 176,221 30.7 51.3 36.4 17.5 2,000,000 730,700 1,220,150 884,000 425,281 36.5 61.0 44.2 21.3 4,000,000 1,808,700 2,751,550 2,080,000 992,861 45.2 68.8 52.0 24.8 6,000,000 3,104,700 4,340,350 3,510,000 1,580,651 51.7 72.3 58.5 25.3 10,000,000 6,050,200 7,540,350 6,500,000 2,691,450 60.5 75.4 65.0 26.9 20,000,000 13,749,700 15,540,350 13,000,000 5,396,430 68.7 77-7 65.0 27.0 40,000,000 29,149,700 31,540,350 26,000,000 10,796,430 72.9 78.9 65.0 27.0 Treasury Department, Division of Tax Research February 28, 1942 114 I-1 Revised. For footnotes ... following page. Regraded Unclass Estate tax liability under present and proposed United States laws and under present British and Canadian laws, for net estates (before exemption but including $10,000 insurance) of selected sizes (Continued-2) Footnotes A specific exemption of $40,000 and a life insurance exclusion of $40,000 are allowed by the present United States law. The proposed law would allow a single specific exemption of $60,000 but no life insurance exclusion. It is assumed that all insurance would have been excluded under the present act. The average amount of excluded insurance in recent years has been about $6,000 per taxable estate. 31 Before credit for death taxes paid to States; this credit is limited to 80 percent of the tax imposed by the 1926 Act, which applied only to estates of more than $100,000. 4/ Pound converted at $4. Excludes legacy and succession duties applicable to personal property and real property, respectively. The rates of tax are graduated on the basis of consanguinity and not on the size of the share received by each beneficiary. Under present law the rates, after certain exemptions, in the case of both of these taxes, are as follows: On shares passing to husband or wife, child or lineal descendant of child, father or mother or any linesl ancestor 1% On shares passing to brother or sister, lineal descendent of brother or sister 5 On shares passing to any other person, including any related only by natural ties 10 In certain cases supplementary rates to & maximum of 13 percent are chargeable excepting as between spouses. The average rate in recent years has been about 1.4 percent of net estates. No allowance is made for the provisions granting relief at points where mites change. If two rates are possible, the higher is used. 14 Assumes equal division of estate between widow and one adult child. No tax, on assumption that full advantage is taken of the $25,000 exemption allowed a widow. 115 CLH Regraded Unclass R FOR de AND 3 and and the Clima IN and 3 S : 118 T 119 as N Last Revised 21 paya m. Bleugh / /8120 February 16, 1942 Statement by Secretary Morgenthau before the Ways and Means Committee I. Introduction I am here to offer my suggestions as to our first revenue act of the war. I hardly need emphasize the seriousness of the occasion. The task before us is to decide how this war is to be financed and how its cost is to be distributed. Economic and social conditions during and after the war will depend to a large degree upon the courage and wisdom with which we attack these problems. Victory in this war will demand expenditures on a scale for which there is no precedent. The President has announced a program involving war expenditures of $52.8 billion in the fiscal year 1943. If we are to furnish the weapons to the men who are doing the fighting, we shall have to mobilize every possible dollar of our income. The President's Budget Message calls for an additional $7 billion in addition to a Social Security Program of $2 billion. This will Regraded Unclassified 121 - 2 - leave $ billion to be borrowed. In so far as is possible this borrowing will be from the income and savings of the great mass of our people. In the development of our program for financing the war, several principles should guide us. The first will be to facilitate the maximum production of war materials. This will mean that our usual ways of living will be drastically affected. We should not hesitate to change our ways of living in any. way that helps the war effort. On the other hand, it is important to the war ef- fort to maintain a high standard of morale in civilian life. Still another consideration is that the read- justment after the war should not be made unnecessarily difficult. We must never forget that our first task is to win the war, but we must also remember that new prob- lems will face us at the end of the war. As we assemble for the consideration of the 1942 tax bill we are confronted with an economic problem which is intimately associated with the need of revenue. I refer, of course, to the grave threat of inflation. In war time money incomes are high due to full employment Regraded Unclassified 122 - 3 - at high wages, while the quantity of civilian goods available for purchase is not enlarged, and in general is actually diminished. Unless effective preventive measures are taken there will result a rapid general increase in prices. While moderate price rises may stimulate produc- tion when resources are partially unused, a substantial price rise would be an unqualified evil at a time when we are approaching full utilization of our productive resources. An inflationary price rise is a source of grave social injustice. It undermines morale and im- pedes war production. The hardships of inflation strike at random without consideration of equity or ability. Once it has acquired momentum, inflation is extremely difficult to control, and it will leave a heritage of post-war difficulties that will haunt us for decades. Every consideration of national welfare calls for its prevention. The way to prevent inflation is to prevent people from engaging in the futile effort to buy more goods than can be produced. This requires a comprehensive and integrated program of anti-inflationary measures, in which increased taxes and increased savings are Regraded Unclassified 123 - 4 - essential parts. Price control, allocations, rationing, and the regulation of consumer credit are other parts of such an integrated program. All these controls are interrelated. The devices of price control, allocation, and rationing will be more effective if taxes and savings are increased. Similarly, the effectiveness of the fiscal devices in preventing inflation will be greater if price and com- modity controls are used. Although increased taxes cannot by themselves solve the inflation problem, a much larger volume of tax revenue is necessary than will be collected from our existing tax system. My purpose today 1s to in- dicate the tax program which the Administration be- lieves should be adopted at this time for the best interest of the country in the light of the considera- tions I have mentioned. II. Objectives of Tax B111 A. Volume of Revenue In reaching the conclusion that the tax bill should raise $7 billion of additional revenue, I have had in mind the fact that the social security program Regraded Unclassified 124 - 5 - should be expanded both as to coverage and as to pro- tection, and that increased taxes and contributions for this purpose should be increased by approximately $2 billion a year. I am not making any recommenda- tions with regard to social security taxation or bene- fits in connection with this bill, but changes of the magnitude indicated should be kept in mind in planning the tax program. B. Restraint of Inflation The tax recommendations. which will be presented have been framed also to promote the objective of curbing inflation as well as raising revenue. I have already indicated the menace of inflation and the manner in which taxes contribute to its restraint. The most effective anti-inflationary taxes are those which bear most directly on consumers' purchasing power. Since mass purchasing power is very largely in the low in- comes, it is necessary to place heavier burdens on such incomes than would be justifiable if there were no inflationary danger. The increased collections for social security taxes will also serve an anti-inflationary purpose. Regraded Unclassified - 6 - 125 C. Ability to Pay In his recent Budget Message the President said that "progressive taxes are the backbone of the Federal tax system." Although the financing of the war requires taxes upon lower income levels to help in restraining inflation, we must not lose sight of the basic principle of our tax system, namely, that taxes should be fair and nondiscriminatory and imposed in accordance with ability to pay. Taxation according to ability to pay leads me to recommend increases in taxes upon higher levels of in- come as well as lower levels. Another corollary of the principle of ability to pay is that special privileges in our tax laws should be removed. Another is that taxes not capable of being adjusted to differences in income or family responsibilities, such as general sales taxes, should be avoided. Finally, it is an essential of taxation according to ability to pay that undue profits should be recaptured wherever they occur. It is not necessary to allow unreasonable profits in order to secure maximum production with economical business management. Under conditions of a war time Regraded Unclassified 126 - 7 - economy the country cannot tolerate the retention of undue profits. III. Tax Recommendations A. Removal of Special Privileges There are in our tax system certain provisions which grant to relatively few of our people special advantages and privileges at the expense of the great mass who must pay what is thereby lost. I am unwilling to ask the great mass of the taxpayers of the United States to pay billions of dollars of additional revenues until these defects have been removed from the tax laws. They are bad enough in time of peace--they are completely inexcusable in time of war. An important example of such a privilege is pre- (Example 1) sented by tax exempt securities. Every element in our population should bear its fair share of the burdens which war imposes. Through tax exempt securities, however, persons with large taxpaying ability find themselves in a sheltered position. For the most part they did not buy these securities at prices reflecting to any significant extent the great privilege of escape from war time burdens and surely the States did not Regraded Unclassified 127 - 8 - offer the securities on any such basis. The holders of tax exempt securities are obtaining what are essen- tially windfall profits in a time of national sacrifice. For a long time Presidents, Secretaries of the Treasury, and Congressional Committees have recommended the elimination of the tax exemption of interest on future Government securities. Last year the Congress, at my recommendation, removed the exemption on interest from future issues of Federal securities. No action has been taken with respect to the interest on future or outstanding State and local securities. In times of peace, when the strain on other elements in the population was not 80 heavy, the gradual elimina- tion of tax exemption through imposing taxes only on future issues had much to recommend it, but the national emergency of war makes this gradual approach unacceptable. I therefore recommend the repeal of the present exemption applicable to outstanding issues of State and local se- curities. Unfortunately, tax exemption clauses appear in many of the outstanding issues of Federal securities and these promises must not be violated. In the case of State and local securities, however, there has never been any contract or moral commitment between Regraded Unclassified - 9 - 128 the Federal Government and the security holders or the local governmental authorities regarding Federal taxation. It is true that some representations have been made in good faith by these governmental authori- ties on the strength of a mistaken interpretation of the Constitution. However, since the Supreme Court decision in the case of Graves V. O'Keefe in 1939 fair minded experts in constitutional law have had no doubt of the Federal power and moral right to tax the income from State and municipal securities. Federal tax policy has never been static; new taxes and higher rates have always been adopted when necessary. Such changes, as well as the possibility of new interpreta- tions of the Constitution, have always been an unavoid- able risk of those subject to our laws. Where this involves special hardships in particular cases, I would recommend that effort be made to devise relief measures designed to alleviate the situation. A tax system cannot be defended which in a time of grave national emergency calls upon the great mass of our taxpayers to shoulder the heavy burden of additional taxes and yet permits persons with large taxpaying ability to pay virtually nothing in taxes. The Regraded Unclassified 129 - 10 - sacrifices necessary to win a war for the benefit of all of us should be shared by all of us--including the holders of tax exempt securities. The President said in his Budget Message, "When 80 many Americans are contributing in their energies and even their lives to the Nation's great task, I am confident that all Americans will be proud to contribute their utmost in taxes." I should feel remiss in duty if I did not recommend the elimination of an exemption which prevents all Americans from contributing their utmost. 2. Percentage depletion. A second example of special privilege 1s the allowance for depletion. At the present time the owners of mines and oil wells are allowed to deduct so-called percentage depletion or cost depletion, whichever is higher. Percentage depletion consists of a certain percentage (27-1/2% in the case of persons having an economic interest in oil and gas properties) of gross income, the deduc- tion being limited to 50 percent of the net income from the property. Under this arrangement percentage deple- tion goes on after 100 percent of the cost is recovered and may substantially exceed depletion based on cost. (Example 2) Regraded Unclassified 130 - 11 - In 1937 the President and the Treasury recommended the elimination of percentage depletion, but no action was then taken. The war has intensified the necessity of the elimination of any such special favor to one group of taxpayers. One of the reasons asserted in behalf of percentage depletion 18 that it stimulates exploration for new mineral properties. If this is a proper objective, it would be better achieved by a special allowance deple- tion to those who do explore for new minerals without indiscriminate extension of the same favor to all owners. At the convenience of the Committee, we shall place before it 8. plan directed to this purpose. So far as other minerals are concerned, it is believed that an adequate stimulus for exploration would remain if the percentages allowable for depletion purposes were sub- stantially reduced. 3. Joint returns. A third example of special favoritism in the tax laws 1s the option allowed married couples to file separate income tax returns. This per- mission has little or no significance for most taxpayers since at the present time married couples with incomes of up to $3,500 (the amount 18 higher in the case of married couples with dependents) pay the same total tax Regraded Unclassified 131 - 12 - whether they file joint returns or separate returns. (Example 3) It may gake a great deal of difference in tax, however, in the case of married couples with large incomes, especially if the income is more or less evenly divided between husband and wife. (Example 4) This difference in tax is unwarranted since in actual operation the family is the economic unit. Two families with the same total income will usually manage and dispose of that income in a similar fashion, regard- less of whether the income is received by only one spouse or is received by both spouses. One difference may be noted-that when both spouses work, the expenses of the family ordinarily are higher than when only the husband works, since the services of the wife in the home must be replaced by hired help. The adoption of mandatory joint returns would remove this tax differential and would also eliminate two specific kinds of tax avoidance which are present under existing law. The first is the treatment of community income in the so-called community property states. In the non-community property states the income is taxable to the spouse who earns it. In the community property states, however, the husband who earns the Regraded Unclassified 132 - 13 - income may for tax purposes attribute half the earnings to his wife, although he retains the management and control of all the earnings. The result is that married couples in community property states receive & very substantial tax advantage over those living in other (Example 5) states. This advantage would be removed if joint returns were made mandatory. A second source of tax avoidance which would be eliminated by mandatory joint returns is the possibility of manipulating incomes within families. For example, if the husband receives 8. large amount of income from securities, he may reduce the family income tax sub- stantially (and also reduce the amount of estate tax in case he predeceases his wife) by giving a portion of his (Example 6) fortune to his wife. This, and other methods of reducing taxes by married couples, would be eliminated through provision for mandatory joint returns. It is accordingly suggested that the filing of joint tax returns by married couples be made mandatory with a special allowance for the earned income of the wife in order to give recognition to the loss of the wife's services in the home. (Example 7) Regraded Unclassified 133 M 14 - At the increased rates of individual income tax previously suggested, it is estimated that the revenue from requiring the filing of joint income tax returns would be approximately $ 4. Capital gains, At the present time the maximum tax rates on gains from capital assets hold 18 months or more are disproportionately low, having been left at their 1938 level of an effective rate of 15 percent, while other income taxes have been very substantially increased. (Example 8) The rate increases on other incomes have encouraged an unusually large amount of capital loss realization which was unusually noticeable during the last few weeks in 1941 and indicated tremendous use of capital losses to escape taxation on other income. In the light of these facts, the following sugges- tions are made with respect to the tax treatment of capital gains and losses. It 1s suggested, first, that capital gains from assets held 18 months or more be included in income at 50 percent, which is the present rule for gains from assets held two years or more. It is suggested that the maximum tax rate, which is allowed the taxpayer as an alternative in place of the regular progressive tax rate, should be increased from the present Regraded Unclassified 134 - 15 - 30 percent to 60 percent, changing the maximum effective rate of tax on capital gains from 15 percent to 30 per- cent. It 1s recommended also that long-term capital losses be not allowed as a deduction against ordinary income, but that instead they be allowed to be carried forward for a liberal period, perhaps 5 years, as & deduction against long-term gains. Similarly, the pro- vision for the carry-over of short-term capital losses should be liberalized, It is suggested further that the basis of property for the computation of capital gains and losses be not changed at the death of the owner as at present, but that the basis in the hands of the person receiving the property be made the same as it was in the hands of the decedent, 5. Other examples of unwarranted favorable treatment. There are a number of other respects in which the tax laws grant unwarranted favorable treatment. The life insurance companies of the United States with assets of $ , premiums of $ , and investment income of $ 2 had a total income tax (Example 9) of only $ Many mutual casualty insurance companies are exempt from taxation. Other companies, while nominally subject to tax, ordinarily pay no tax Regraded Unclassified like 135 - 16 - because the allowance of expenses, losses and returned premiums more than offsets their included income. The provisions of insurance company taxation should be changed to remedy these defects and impose a fair burden of taxation on the insurance business. Banks and other taxpayers owning tax exempt interest bearing securities are able to deduct, against their taxable income, expenses allocable to the tax exempt securities. Obviously, this special favor should be (Example 10) eliminated from the statute. Under existing law trusts may be set up to provide pensions for a few high-salaried key men in a corporation. Although provision for the protection of retired employees is laudable there is no reason why tax benefits should be granted in order to provide large pensions for high-salaried executives. It is therefore suggested that the pension trust provision be amended to require a more general coverage of employees and to limit the amount which may be paid as a pension to any one officer or employee. Time does not permit the enumeration of still other tax advantages that should be removed. They will be presented to the Committee at your convenience. Regraded Unclassified 136 - 17 - B. Removing Other Discriminations The inequities of our tax laws work in two direc- tions. As I have said, some of them extend undue privileges to a favored few. Still others result in unfair burdens upon certain taxpayers. Such inequities are like the defects in a picture-bad enough when the picture is on & small scale, but increasingly glaring as the picture is enlarged. With rates at war time levels it becomes urgent to correct all such defects. I, therefore, propose that we make every effort in this session of Congress to eliminate all hardships of this character Bo that our tax laws will cast their burden equitably upon all taxpayers. C. Individual Income Taxes Most of the revenue that will be raised by the elimination of special privileges will come from the individual income tax. In addition, it is recommended that the individual income tax be changed to yield approx- imately $2.5 billion, or 50 percent more revenue than will be yielded under the present law. In recommending this amount I have had in mind the fact that the great bulk of tax increases under the social security changes will fall on individual incomes. Regraded Unclassified 137 - 18 - The individual income tax is the best available type of tax based upon ability to pay. Its rates and exemptions can be adjusted according to amount of income and differing family responsibilities, Further- more, it 1s a direct tax. It falls where the Congress wants it to fall. I am suggesting a substantial increase in the income surtax rates throughout the scale. At the present time the first surtax bracket combined with the normal tax 1s 10 percent. Under the proposed schedule it would be 20 percent. The surtax rates above the first bracket would be progressive and would be increased in every bracket of income. The rate scale, together with comparative effective rates of tax, under present law and under the suggested scale, are shown in the accompanying tables. (Exhibits A, B, C, D). Because of the large increases suggested in the rates, it becomes essential to afford a more convenient method for the payment of income taxes. Regraded Unclassified 19-20 A provision for the collection of 8.8 tax as possible at the source for those are paid periodically, including wages, Balar bond interest, dividends, and royalties, 18 too available expedient to this end. To institute a system immediately, however, might cause conside able hardship to taxpayers because of the substantia increases they are already called upon to pay during the year 1942 a.B a result of the Revenue Act of 1941. On the other hand, if the threat of inflation makes necessary quick and substantial increases in the rate of tax collection, the institution of collection at the source cannot be postponed. Since it 16 not known how soon substantial increases in the rate of tax collection may be necessary for the restraint of inflationary price rises, it would be desirable to enable the collection of income taxes at the source at any time and at rates within the discretion of the Treasury up to 10 percent. This will furnish desirable flexibility without imposing additional taxes that may not be necessitated by future economic conditions. Regraded Unclassified 138 19-20 A provision for the collection of 86 much of the tax 86 possible at the source for those incomes that are paid periodically, including wages, salaries, bond interest, dividends, and royalties, is the best available expedient to this end, To institute such a system immediately, however, might cause consider- able hardship to taxpayers because of the substantial increases they are already called upon to pay during the year 1942 8.8 a result of the Revenue Act of 1941. On the other hand, if the threat of inflation makes necessary quick and substantial increases in the rate of tax collection, the institution of collection at the source cannot be postponed. Since it 18 not known how soon substantial increases in the rate of tax collection may be necessary for the restraint of inflationary price rises, it would be desirable to enable the collection of income taxes at the source at any time and at rates within the discretion of the Treasury up to 10 percent. This will furnish desirable flexibility without imposing additional taxes that may not be necessitated by future economic conditions. Regraded Unclassified 139 - 21 - D. Corporation Taxes It 1s recommended that additional taxes be raised from corporations in the amount of $3 billion, an increase of slightly more than 40 percent. A substantial share of the increased corporation tax should fall on excess profits. Taxes paid from such profits have less disrupting effects on business than have taxes which are generally applicable to all 00 rporate earnings, irrespective of amount. A tax which absorbs excess profits still leaves the corporate taxpayer with B. sufficient margin of income for divi- dends and safety and for continued incentive to produce. Regraded Unclassified 140 - 22 - On the other hand, a tax which dips too deeply into the incomes of low earning corporations may seriously affect their debt-paying capacity, if not their very existence. Excess profits taxes have the additional virtue of recapturing undue profits on war contracts. It is suggested that the maximum rate of the excess profits tax be increased from 60 percent to 75 percent with corresponding increases in the lower rate brackets. With rates of this magnitude it is increasingly important to have a fair basis from which to measure the profits subject to the excess profits tax. In addition to the many provisions in existing law to adjust earnings of the base period to correct for unusual circumstances, it is suggested that further relief be afforded where the earnings of the base period were abnormally depressed, such relief to be administered by a special board in the Treasury Department. It is believed that other changes in the excess profits tax law should also be made, some to eliminate defects which have been brought to light in the opera- tion of the law, and others to eliminate unnecessary Regraded Unclassified 141 - 23 - hardships. These changes are of a more technical char- acter and will be presented to the Committee later, at its convenience. Under present conditions, when incomes of many businesses are declining because of shortages of raw materials and for other reasons, the corporation which continues to earn as much as it did during the base period 1s in better position to pay taxes than 18 the corporation whose earnings have declined, just as the corporation which 18 making more than its base period earnings 18 in better position to pay taxes than the corporation which 18 merely maintaining such earnings. At a time when very heavy taxes must be imposed on corporations, there should be a differentiation between corporations which have suffered a substantial decline in earnings and corporations which have not, It is therefore suggested that a portion of the increased corporation tax be imposed in the form of a. special war tax against which a tax credit would be allowed for corporations whose incomes have declined. The credit would be determined by the extent that the sur- tax net income of the taxable year 1s less than the Regraded Unclassified 142 - 24 - average surtax net income of the years 1936 - 1939. It 1s suggested that the rate of the war tax be 10 per- cent with the tax credit computed at 5 percent. It is suggested that the balance of #3 billion additional corporate taxes be provided by increasing the rates on corporate incomes generally. It 16 suggested that the surtax be increased from 7 percent to 21 percent with smaller increases for corporations having less than $50,000 income. The normal tax rate might be increased from 24 percent to a round figure of 25 percent, but there should be no further increase in the corporate normal tax because any such increase would result in an undesirable windfall to the holders of partially tax exempt Federal securities. (Example 11) There can be no fair quarrel with the imposition upon corporations of a substantial proportion of the increased load of taxation required by our national peril. We are fighting for the maintenance of the very system of free enterprise which makes corporate profits Regraded Unclassified 143 - 25 - possible. I am confident that incorporated business will willingly pay at such a time an additional amount of tax which will leave it in a position in which its profits after taxes will in the aggregate be at the level of corporate earnings during the prewar years. The imposition of corporation taxes at the level and in the manner suggested will require B very high rate of tax on any additional profite earned by corpora- tions subject to maximum excess profits tax rates. In the oritical months ahead our patriotism will be put to the acid test. It must rise above the profit motive. National war production depending upon that motive alone may be tragically inadequate. This is a time in which we must forget profits and concentrate upon a supreme productive effort which alone will win the war. However, it is recognized that very high top, or so-called "marginal rates," may leave little incentive for the maintenance of efficiency in business operation. Furthermore, after the war there may well be need for B. large volume of expenditure in readjusting industry and maintaining employment. For these reasons it is believed desirable that in the case of any dollar of corporate profits the receipt of which results in an Regraded Unclassified 144 - 26 - increase in tax beyond 80 cents, the additional tax on such dollar shall be held by the Government to the account of the corporation and be returnable within & limited period after the war, in those cases where it is spent for new and additional capital equipment or otherwise 18 spent in the additional employment of labor. When tax rates are very high it 18 more than ordinarily important that profite be accurately deter- mined. The determination of profits on an annual basis necessarily depends largely on more or less uncertain prophecies of the future and some of these prophecies later turn out to be false. Some supposed profits prove, in the light of subsequent events, to be illusory; this sometimes happens, for example, to be profits due to the rising prices of inventories. In a period combining unusual uncertainty and high tax rates, such as the present, there should be in the tax law provision for the practical correction of tax liabilities based upon erroneous assumptions. The uncertainties of this period also make it important to reduce the necessity for prophesying to the minimum, The capital stock tax and the associated Regraded Unclassified 145 - 27 - declared value excess profits tax are determined largely by the accuracy of guesses about future profits. It 18 suggested that the revenue produced by these taxes can be more fairly and less harmfully produced by the other taxes on corporations and that accordingly the capital stock and declared value excess profits taxes be repealed. E. Estate and Gift Taxes The estate and gift taxes are imposed at the time of the transfer of wealth from one person to another. Many of the fortunes which are being transferred, and will be transferred in the future, were built up during a period when income tax rates were far lower than they are today. It is much more difficult now to build up large holdings of property. For this reason substantial increases in the estate and gift taxes should be imposed as a method of equalizing tax burdens. The guggested increases are indicated in the tables. (Exhibet E and F) In conjunction with the rate increases, it 18 suggested that the existing insurance exclusion of $40,000 be merged with the existing exemption of $40,000, and that a single exemption of $60,000 be allowed. This will increase the present exemption in some cases and Regraded Unclassified 146 - 28 - decrease it in others, and will remove & discrimination between persons who are insured and those who are not. It 16 likewise suggested that the exemption for the gift tax be reduced to $30,000 and that the annual exclusion of gifts be made a total of $5,000 for each donor, regardless of the number of donees to whom property is given. It is believed that these changes in rates and exemptions, together with certain changes designed to prevent avoidance of the tax, will increase the annual revenue from the estate and gift taxes by $ F. Excise Taxes New and increased special excise taxes are suggested to raise approximately $11.2 billion of additional revenue. Although these excise taxes are in the nature of sales taxes, their effects are substantially different from the effects of general sales taxes. Many of them are imposed on commodities of which there 1s or will increasingly be a scarcity. Such taxes not only yield revenue but help to conserve materials needed for defense. Those excise taxes not relating to commodities of which there 1s a particular scarcity have been chosen 60 as Regraded Unclassified 147 - 29 - to fall on goods which are widely used and are of a luxury or semi-luxury character. The increase in consumer incomes will permit maintenance of the demand for those commodities despite the higher taxes, The Government will thus secure needed revenue, consumer purchasing power will be tapped, the producers will not be injured, and the consumers will not be taxed on necessaries of life. These special excise taxes have the further advan- tage of not requiring any substantial expansion of admin- istrative machinery. No general sales tax is recommended and, indeed, I strongly urge that no such tax be made a part of this revenue bill. The general sales tax falls on scarce and non-scarce commodities alike. It falls across the board on necessaries and luxuries alike. It bears dispropor- tionately on the low income groups whose incomes are (Example 12) almost wholly spent on consumers goods. It is, therefore, regressive and harmfully encroaches upon the standard of living. It increases prices and makes price control more difficult. It stimulates demande for higher wages and adds to the parity prices of agricultural products. It is not, as many suppose, easily collected; on the contrary, its collection would require much additional administra- tive machinery at a time when manpower is scarce. Regraded Unclassified 148 - 30 - IV. Conclusion I would like to end my recommendations with a further plea as to their importance as part of our war effort. Your task is the hardest any Congress has ever faced. The consequences of failure are staggering. But-on the happier side--if our war financing is wisely done, war production will to encouraged, inflation will be curbed, public morale will be improved, and our economic world after the war will be in a better posi- tion to meet the inevitable problems following victory. Such objectives cannot be painlessly accomplished. There must be temporary dislocation, hardship, and sacrifice. But I feel certain that we will all rise to the challenge presented to us. Taxes have been described by & great American as "the cost of living in a civilized society." It will be our privilege to pay that cost cheerfully. This is the spirit in which the American people will want to approach the problem of financing the war, RB:ded 2/18/42 Regraded Unclassified 149 EXAMPLES 150 LIST OF EXAMPLES 1, Tax saving through fully tax exempt securities. 2. Percentage depletion in excess of cost, 3. Individuals with small incomes derive no benefit from separate returns. 4. Tax saving through filing separate returns. 5. Tax saving for community income. 6. Tax saving through intra-family gifts. 7. Comparative changes of capital gains tax and tax on other income since 1938. 8. Life insurance companies pay no income taxes. 9. Illustration of banks deducting expenses. 10. Proposed Corporation Tax Plan with Special War Tax. 11. Estimated 1942 distribution of sales tax burden, assuming all consumers' purchases taxable excepting rents. 12. Tax increases due to increasing rates. 13. Collection at source, 14. Compulsory savings for corporations. 15. Estate tax. Regraded Unclassified I 151 the 152 Example Tax saving through fully tax-exempt securities A. A married man without dependents, receiving $250,000 from dividends and $1,000,000 in wholly tax- exempt interest, pays a. total tax of $157,703 under present law. This amounts to 12.6 percent of his total income. If his tax-exempt interest were taxable, his tax would be $930,083 or 74.4 percent of his income. B. A married man without dependents receiving a total income of $250,000, of which $25,000 is salary, $100,000 dividends, and $125,000 wholly tax-exempt interest, pays & total tax of $69,939 under present law. This amounts to 28.0 percent of his total income. If his tax-exempt interest were taxable, the tax would be $157,659, or 63.1 percent of nis income. C. A married men without dependents receiving B. total income of $50,000, of which $10,000 1e salary, $30,000 dividends, and $10,000 wholly tax-exempt Regraded Unclassified 153 Example Tax saving through fully tax-exempt securities Continued - 2 interest pays a total tax of $14,665 under present law. This amounts to 29.3 percent of his total income. If his tax-exempt interest were taxable, the tax would be $20,455, or 40.9 percent of his income Recapitulation 1. A : B : C Salary - $ 25,000 $10,000 Dividends $ 250,000 100,000 30,000 Interest from State and local bonds 1,000,000 125,000 10,000 Total income 1,250,000 250,000 50,000 Present law: Tax 157,703 69,939 14,665 Effective rate 12.6% 28.0% 29.3% If interest were taxable: Tax 930,083 157,659 20,455 Effective rate 74.4% 63.1% 40.9% 2 TO FILL 3 what as the the will 155 Example Percentage depletion in excess of cost 4. An oil company purchased an oil producing property at a cost of $154,461 and in seven years was allowed $316,061 depletion (or 204.6 percent of the cost of the property). At the end of the period 73.4 percent of the original oil reserve still remained. B. This company purchased another oil producing property at a cost of $113,033 and in seven years was allowed $215,390 depletion (or 190.6 percent of the cost of the property). At the end of the period 80.3 percent of the original oil reserve still remained. C. The third oil producing property was purchased at a cost of $176,071 and in six years the company was allowed $184,257 depletion (or 104.6 percent of the cost of the property). At the end of the period 71.8 percent of the original oil reserve still remained. D. A fourth oil producing property was purchased at a cost of $1,120,070 and in six years the company was allowed $872,347 de- pletion (or 77·9 percent of the cost of the property). At the end of the period 82.8 percent of the original oil reserve still remained. Regraded Unclassified 156 EXAMPLE Percentage depletion in excess of cost Continued - 2 Recapitulation : A : B : C : A Cost of property $154,461 $113,033 $176,071 $1,120,070 Depletion deduction: Amount 316,061 215,930 184,257 872,347 Percent of cost of property 204.6% 190.6% 104.6% 77.9% Percent of original oil reserve remain- ing 73.4% 80.3% 71.8% 82.8% 3 47 of 158 Example Individuals with small incomes derive no benefit from separate returns 4. Under present law, the tax liability of a married couple without dependents, having $2,000 of net income and filing a joint return, is $42. If each spouse files a separate return, one reporting 60 percent and the other 40 percent of the income, their combined tax is still #42. B. For a married couple with a net income of $3,000, the total tax liability is $138 under either a joint return or under separate returns. C. For a married couple with $3,500 net income, the total tax liability is $186 under either & joint return or under separate returns. Recapitulation : A : B : C Net income $ 2,000 $ 3,000 $3,500 Tax liability, joint returns 42 138 186 Combined tax liability, separate returns 42 1/ 138 186 Tax savings; separate returns --- --- --- 1/ One spouse reports 60% and the other 40% of the income. 4 THE as of M and fail the 160 Example Tax saving through filing separate returns A. Under present law, the tax liability of a married couple without dependents, having $100,000 of net income and filing a joint return, is $52,704. If each spouse files a separate return, one reporting 60 per- cent and the other 40 percent of the income, their com- bined tax liability 18 reduced by $10,691, to $42,013. B. For B. married couple with net income of $20,000, the tax liability on a joint return is $4,614; on & separate return, $3,005. The tax saving is $1,609. C. For & married couple with $10,000 net income, the tax liability on a joint return 18 $1,305. If they file separate returns, their combined liability is reduced by $340, to $965. Recapitulation : A : B : C Net income $100,000 $20,000 $10,000 Tex liability, joint returns 52,704 4,614 1,305 Combined tax liability, separate returns 42,013 3,005 965 Tax saving under separate returns 10,691 1,609 340 1/ One spouse reports 60% and the other 40% of the income. Regraded Unclassified POLICY the am and the to 1 1 at the 5 161 the no 162 Example Tax saving for community income A. Under present law, the tax on a married man with- out dependents, having a net income of $20,000, is $4,614. The tax on the same amount of community income is $2,985. B. Under present law, the tax on a married man with- out dependents, having a net income of $50,000, is $20,439. The tax on the same amount of community income is $14,448. C. Under present law, the tax on a married man with- out dependents, having a net income of $100,000, is $52,704. The tax on the same amount of community income is $41,763. Recapitulation : A : B : C Net income $20,000 $50,000 $100,000 Tax liability, non-community income 4,614 20,439 52,704 Tax liability, community in- come 2,985 14,448 41,763 Effective rates Non-community income 23.1% 40.9% 52.7% Community income 14.9% 28.9% 41.8% 163 6 1 164 EXAMPLE Tax saving through intra-family gifts A. A married man without dependents owne 8 $1,000,000 equity in a corporation yielding $100,000 8 year. He has no income from other sources and his total tax under present law 18 $52,748. If he transfers half of his equity in the cerporation to his wife, the combined tax on their separate incomes amounts to only $41,852. The tax saving amounts to $10,896. The tax saving does not allow for the gift tax payable on the intra-femily gift. T he gift tax would, however, in general, be more than offset by reduction of the estate tax base. B. If a married man without dependents has a salary of $50,000 and an investment yielding $100,000 his total tax under present law is $87,189. If he trans- fers half of his investment to his wife, the combined tax on their separate incomes amounts to $74,140, or a tax saving of $13,049. The tax saving does not allow for the gift tax payable on the intra-family gift. The gift tax would, however, in general, be more than off- set by reduction of the estate tax base. Regraded Unclassified 7 did 166 Example Comparative changes of capital gains tax and tax on other income since 1938 An individual with a surtax net income of $50,000 from ordinary sources who received an additional dollar of income is the form of long-term capital gains would be subject to a tax of 15 percent on that additional income under the Revenue Acts of 1938, 1940 and 1941. However, if the additional dollar of income were from ordinary sources, such as interest or dividends, a tax would be imposed at the rate of 35 percent under the 1938 Revenue Act, 48 percent under the 1940 Revenue Act 1. 6% percent under the 1941 Revenue Act, and & 80 percent under the proposal. B. An individual with a surtex net income of $75,000 from ordinary sources, who received an additional dollar of income in the form of long-term capital gains would be subject to & tax of 15 percent on that addi- tional income under the Revenue Acts of 1938, 1940 and 1941. However, if the additional dellar of income were 1/ Excluding 10 percent defense tax. Regraded Unclassified 167 Example Comparative changes of capital gains tax and tax on other income since 1938 - Continued 2 from ordinary sources, such as interest or dividends, a tax would be imposed at the rate of 51 percent under the 1938 Revenue Act, 54 percent under the 1940 Revenue Act 1/, 65 percent under the 1941 Revenue Act, and 84 per- cent under the proposal. C. An individual with a surtax net income of $100,000 from ordinary sources, who received an additional dollar of income in the form of long-term capital gains would be subject to a tax of 15 percent on that additional income under the Revenue Acts of 1938, 1940, and 1941. However, if the additional dollar of income were from ordinary sources, such as interest or dividends, a tax would be imposed at the rate of 62 percent under the 1938 Revenue Act, 62 percent under the 1940 Revenue Act 1/, 69 percent under the 1941 Revenue Act, and 90 percent under the proposal. 1/ Excluding 10 percent defense tax. Regraded Unclassified 168 Example Comparative changes of capital gains tax and tax on other income since 1938 - continued 3 Recapitulation : 1 Tax rate on additional dollar of -- : : Capital : : Surtax net : gains : Income from ordinary sources : income : Rev.Acts:Rev.Act:Rev.Act: Rev.Act: Pro- : : 1938-41 : 1938 :1940 1/: 1941 :posal A $50,000 15% 35% 48% 62% 80% B 75,000 15% 51% 54% 65% 84% C 100,000 15% 62% 62% 69% 90% 1/ Exclusive of 10 percent defense tax. Regraded Unclassified 169 = 4 8 170 Example Life insurance companies pay no income taxes A. None of the 26 largest life insurance companies paid cerperation income taxes in 1938 or 1939, although these companies represent 87 percent of the assets of all life insurance companies. B. In 1939, out of 656 active life insurance com- panies, only 114 paid any corporation income taxes whatever. The combined taxes for all these companies amounted to less than one-half million dellars ($459,000). Over one-half of all income taxes collected from insurance companies came from 4 medium-sized companies accounting for less than 1 percent of the assets of all life insurance companies. c. In 1938 a certain large insurance company 1/ had assets of ever $5.0 billion, premium income of $756 million, investment income of $245 million, and 1/ Metropelitan Life 171 Example Life insurance companies pay no income taxes Continued - 2 insurance in force amounting to over $11 billion. This company had no income tax liability. D. In 1938 another large insurance company 1/ had assets of almost $4.0 billion, premium income of $650 million, investment income of almost $200 million, and insurance in force amounting to $8.8 billion. This company also had no income tax liability. 1/ Prudential 172 9 173 Example Illustration of banks deducting expenses In 1940 a bank with net income, including tax- exempt interest, of $15.5 million reported a deficit for normal tax purposes of $6.0 million and no tax liability. Under the proposal this bank would pay a tax of $2.8 million. B. In 1940, & bank with net income, including tax- exempt interest, of $14.4 million reported normal tax net income of $35,230 and a tax of $8,025. Under the proposal this bank would pay a tax of $3.9 million. Recapitulation : A : B Net income including tax-exempt interest $ 15.5 million $ 14.4 million Normal tax net in- come, present law - 6.0 million 35,230 Tax liability, present law --- 8,025 Tax liability, proposal 2.8 million 3.9 million 174 10 and and M 175 Example Proposed corporation tax plan 4. In 1940 a certain company 1/ had a net income of 0347.3 million. It would use the income method and would have an excess-profits credit of $217.8 million. Its total tax liability under present law would be $156.6 million. Under the proposal, this company using the same excess-profits credit, would have an excess-profits tax liability of $88.7 million. Its net income, after the deduction of the excess-profits tax would be $258.6 million, on which it would have a normal and surtax liability of $142.2 million. Its total tax liability under the proposal would be $230.9 million or an effective rate of 66.5 percent. This compares with an effective rate of 45.1 percent under present law. The combined tax rate applicable to its last dol- lar of income is 88.8 percent compared with 72.4 percent under present law. 1/ General Motors 176 Example Proposed corporation tax plan continued - 2 B. In 1940 a certain company 1/ had a net income of $35.8 million. It would use the income method and would have an excess-profits tax credit of $30.8 million. Its total tax liability under present law would be $13.0 million. Under the proposal, this company, using the same excess-profits credit, would have an excess- profits tax liability of $3.5 million. Its net in- come, after the deduction of the excess-profits tax would be $32.3 million, on which it would have a normal and surtax liability of $17.7 million. Its total tax liability under the proposal would be $21.3 million or an effective rate of 59.4 percent. This compares with an effective rate of 36.4 percent under present law, The combined tax rate applicable to its last dollar of income 1s 88.8 percent, compared with 72.4 percent under present law. 1/ Coca Cola Regraded Unclassified 177 Example Proposed corporation tax plan continued - 3 Recapitulation : : A : B : (money figures in millions of dollars) Net income $347.3 $ 35.8 Excess-profits credit and exemption 217.8 30.8 Proposed excess-profits tax 88.7 3.5 Proposed normal tax 62.1 7.8 Proposed surtax 80.2 10.0 Total proposed tax liability 230.9 21.3 Total tax liability, present law 156.6 13.0 Effective rate Present 45.1% 36.4% Proposed 66.5% 59.4% Combined rate on last dollar of income Present 72.4% 72.4% Proposed 88.8% 88.8% Regraded Unclassified 178 Example Computation of War Surtax with Relief (No excess profits tax) Base period surtax net income $150,000 1942 surtax net income 50,000 Decrease in surtax net income 100,000 Computation of surtax 1942 surtax net income 50,000 31 percent gross surtax 15,500 Less: 10 percent of decrease in surtax net income 10,000 Surtax 5,500 Normal tax (24 percent) 12,000 Total tax 17,500 Portion of net income taken in tax 35 percent 179 Example Computation of War Surtax with Relief (No excess profits tax) Base period surtax net income $150,000 1942 surtex net income 100,000 Decrease in surtax net income 50,000 Computation of surtax 1942 surtax net income 100,000 31 percent gross surtax 31,000 Less: 10 percent of decrease in surtax net income 5,000 Surtax 26,000 Normal tax (24 percent) 24,000 Total tax 50,000 Portion of net income taken in tax 50 percent Pogradod 180 Example Computation of War Surtax Excess profits credit (8% of invested capital) $160,000 Base period surtax net income 150,000 1942 surtax net income 150,000 Decrease in surtax net income 0 Computation of surtax 1942 surtax net income 150,000 31 percent gross surtax 46,500 Normal tax (24 percent) 36,000 Total tax 82,500 Portion of net income taken in tax 55 percent Regraded Unclassified 181 11 (Confidential) Estimated 1942 distribution of sales tax burden, assuming all (Rough estimates) consumers' purchases taxable excepting rents 182 (1) (2) (3) (4) (5) (6) (7) : : : Distribution of Families and single Aggregate income : : : individuals distribution aggregate sales Income level : : : tax burden :Percentage:Cumulative:Percentage:CumlativesPercentaga:Cumulative : of total :percentage: of total :percentage: of total :percentage Under $500 6.8% 6.8% 1.0% 1.0% 2.04% 2.04% # 500 - 750 8.8 15.6 2.3 3.3 3.62 5.66 750 . 1,000 10.7 26.3 4.0 7+3 5.78 11.44 1,000 - 1,250 12.1 38.4 5-7 13.0 7.69 19.13 1,250 - 1,500 10.8 49.2 6.1 19.1 7.89 27.02 1,500 - 1,750 10.0 59.2 6.7 25.8 8.34 35.36 1.750 - 2,000 7.4 66.6 5.7 31.5 6.70 42.06 2,000 - 2,500 8.8 75.4 8.1 39.6 9.29 51.35 2,500 - 3,000 6.7 $2.1 7-5 47-1 8.19 59.54 3,000 el 4,000 7-7 69.8 10.8 57+9 11.14 70.68 4,000 - 5,000 4.2 94.0 7.6 63.5 7.31 77+99 5,000 10,000 3.6 97.6 10.2 75-7 8.51 $6.50 10,000 OR 2.4 100.0 24.3 100.0 13.90 100.00 that 100.0 100.0 100.00 Division of Tax Research Primary 20, 1948 Bebet Date is columns 2 through 5 cannot be released except with specific assent of the Agency. which supplied them. Regraded Unclas 183 Approximate 1942 retail sales tax burden, as percent of consumer income, by income classes (Assuming all consumer purchases, except rent, taxable) : Sales tax, as percent of income, under a Consumer : sales tax rate income : : Which imposes a burden equal to class : of 1% : 1% of consumer income on those : : with incomes of : : Less than $500 : Over $10,000 Under $500 1.06% 1,00% 3.65% 500 - 750 .81 .76 2.79 750 - 1,000 -75 .71 2.60 1,000 - 1,250 .71 .67 2.43 1,250 - 1,500 .68 .64 2.33 1,500 - 1,750 .65 .62 2.25 1,750 - 2,000 .62 .59 2.14 2,000 - 2,500 .60 -57 2.06 2,500 - 3,000 .57 .54 1.97 3,000 - 4,000 .54 .51 1.86 4,000 - 5,000 .50 .47 1.73 5,000 - 10,000 .44 .41 1.51 10,000 and over .29 .27 1.00 Treasury Department, Division of Tax Research February 23, 1942 Regraded Unclassified 184 12 185 Example Tax increases due to increasing of rates 4. A married person with two dependents having earned income of $3,000 has an income tax liability under present law of $58. Under the propesal, his tax would be $118, an increase of $60. The effective rate of tax at present is 1.9 percent and under the pre- pesal, 3.9 percent. B. A married person with two dependents having earned income of $5,000 has an income tax liability under present law of $271. Under the proposal, his tax would be $587, an increase of $316. The effective rate of tax at present is 5.4 percent and under the proposal, 11.7 percent. c. A married person with two dependents having earned income of $10,000 has an income tax liability under present law of $1,117. Under the proposal, his tax would be $2,143, an increase of $1,026. The effective rate of tax at present is 11.2 percent and under the preposal, 21.4 percent. 186 Example Tax increase due to increasing of rates continued - 2 D. A married person with two dependents having earned income of $100,000 has an income tax liability under present law of $52,160. Under the proposal, his tax would be $68,261, an increase of $16,101. The effective rate of tax at present is 52.2 percent and under the proposal, 68.3 percent. Recapitulation : Tax liability, married : Effective Example : Net : person, two dependents : rates : income : Present : Pro- : Increase : Present : Pro- : : law : posal : : law : posal A $ 3,000 $ 58 $ 118 $ 60 1.9% 3.9% B 5,000 271 587 316 5.4% 11.7% C 10,000 1,117 2,143 1,026 11.2% 21.4% D 100,000 52,160 68,261 16,101 52.2% 68.3% Regraded Unclassified was ET 188 Example Collection at source so A married person with two dependents having earned income of $3,000, would, under the proposal, have a tax liability of $118. Of this amount $70 or 59.3 percent would be withheld at source, B. A married person with two dependents having earned income of $5,000 would, under the proposal, have a tax liability of $587. Of this amount $270 or 46.0 percent would be withheld at source. C. A married person with two dependents having earned income of $10,000 would, under the proposal, have a tax liability of $2,143. of this amount $770 or 35.9 percent would be withheld at source. D. A married person with two dependents having earned income of $50,000 would, under the proposal, have a tax liability of $26,537. Of this amount $4,770 or 18.0 percent would be withheld at source. 189 Example Collection at source Continued - 2 Recapitulation : : Tax liability, married :Percent : : person, two dependents :of total Example: Net income: :tax with- : : Total : Amount withheld :held at : : : at source : source A $ 3,000 $ 118 $ 70 59.3% B 5,000 587 270 46.0 C 10,000 2,143 770 35.9 D 50,000 26,537 4,770 18.0 14 191 Example Compulsery savings for corporations A corporation with surtax net income of $1,000,000 and subject to the top excess-profits tax rate of 75 per- cent, would be subject to a total normal and surtax rate of 55 percent on the balance of net income after surtax. The tax on the last dollar of income is 88.75 cents. The excess of the tax over 80 cents on any dollar of income will be held by the Government to the account of the corporation and be returnable within a limited period after the war, in those cases where it 1s spent for new and additional capital equipment or otherwise is spent in the additional employment of labor. ST 192 193 Example Estate tax 4. A person with a net estate of $60,000 before specific exemption (excluding life insurance) would pay, under present law, an estate tax of $500, or an effective rate of 0.8 percent. Under the proposal which would allow a single specific exemption of $60,000 but no life insurance exclusion, this person would pay no estate tax, B. A person with & net estate of $200,000 before specific exemption (excluding life insurance) would pay, under present law, an estate tax of $35,700, or an effective rate of 17.9 percent. Under the proposal which would allow a single specific exemption of $60,000 but no life insurance exclusion, this person would pay $46,950,or an effective rate of 23.5 per- cent. c. A person with a net estate of $2,000,000 before specific exemption (excluding life insurance) would 194 Example Estate tax Continued - 2 pay, under present law, an estate tax of $730,700, or an effective rate of 36.5 percent. Under the proposal which would allow a single specific exemption of $60,000 but no life insurance exclusion, the person would pay $1,220,150, or an effective rate of 61.0 per- cent. Recapitulation : A : B : C Net estate before specific exemption $ 60,000 $ 200,000 $ 2,000,000 Present estate tax 500 35,700 730,700 Proposed estate tax --- 46,950 1,220,150 Effective rate Present 0.8% 17.9% 36.5% Proposed --- 23.5% 61.0% 195 February 20, 1942 12:19 D.M. yyJr: Hello. Grace Tully: Hello. Mr. Secretary. VMJr: Yes. :2 Mr. Secretary, on your memorandum about Pike this morning. HMJr: Yes. T: the President eays everybody's pleaded with him, meaning the President, to keep Pike on the SEC Commission, and he suggests you talk to Ganson Purcell about it; but he said that they've all cleaded to have him kent on there. HYJr: But if it's all right with Purcell T: Well, he didn't - I didn't ask him further than that because he said everybody had said that they needed Pike on that Commission and that they'd pleaded with him, and then he said, "Talk to Purcell." HMJr: Well, if I clear 7: If you want to give us a report on what Purcell says, all right. I'll take it up with him again. HMJr: With pleasure. T! All right, sir. HMJr: With pleasure. T4 Right. MJr: Thank you. T: All right, Mr. Secretary. HMJr: Thank you. T: Good-bye. Regraded Unclassified co - Mr. Foley 196 February 20, 1942 12:20 p.m. HXJr: Hello. Ocerator: Mr. Pike. HNJr: Hello. Summer Pike: Yes, sir. HMJr: Mr. Pike, I got this word back from the White House, that everybody at the SEC is pleading with the President to leave you over there. P: oh. HWr: And that I should talk with Purcell. P: Yeah. HMJr: Now, before I talk with him, I Just thought I'd ASK you if it wee all right. P: Oh, yes. Oh, yes, Mr. Secretary. I think that HMJr: You don't want to telk to him first yourself? P: Well, AS a matter of fact, when I came over we were just going in to meet him, and I had a couple of minutes with him. I thought that probably that might work out that way, and I told him what we had talked over this morning, extremely briefly, so that he had prepared on that. HMJr: He 187 Well, I didn't want to call him without talking to you first. P: Well, that's all right. Thank you very much. HMJr: Well, I'll call him and tell him I want you. P: Well, all right. HMJr: The President didn't turn me down, you see. Regraded Unclassified 197 - 2 - P: Yeah. HMJr: Yeah. P: Yeah. HMJr: Right. P: Righto, thank you. HMJr: Good-bye. 00 - Mr. Foley 198 February 20, 1942 12:26 p.m. Ganson Purcell: Hello, sir. HMJr: How are you? P: Fine, thank you. HMJr: Good. P: How are you, sir? HMJr: Fine. Mr. Purcell, Sumner Pike, I understand, has talked to you about what I've asked him to do P: Yeah. HMJr: in connection with Aniline Dye. P: Yeah. HMJr: Now, he'd like to do it, and I'm extremely anxious to have him do it, and I called up the White House and asked them to ask the President about it, and I got word back that - to talk to you first. P: Uh huh. HMJr: And 80 I'm calling up to urge the Commission to let Mr. Pike go ahead and do this for us because we think it's terribly important to do the first one right. P: Well, I can understand your position. HMJr: And it's - they've got a lot of war contracts and we're up against a very tough situation there and - because they got off to such a bad start. P: Yes. Well, I can appreciate your situation. All I can ask is that you give some consideration to ours. We're in an awful tough spot. HMJr: Uh huh. 199 - 2 - P: And, of course, Summer is a tower of strength here. On many angles, as you know, he's 80 well informed HMJr: Yeah. P: ..... that he's 8 great help to us. HMJr: Yeah. P: I would - I'd very much like to have 8 talk with you about this if I could. HMJr: Well, that's P: Sit down and talk it over with you. HMJr: Well P: I think I could point out some of the problems that we've got here. HMJr: How about four o'clock? P: Four o'clock this afternoon? HMJr: Yeah. P: Surely, sir. HMJr: I'll be glad to see you. P: I'll come over to your office then. HMJr: Fine. P: All right, Mr. Secretary. HMJr: Do you want to come alone or with Sumner Pike? P: Well, perhaps I should come alone first; but I'll talk with him and see how he feels about it. HMJr: All right. P: All right. 200 - 3 - HMJr: This is something that we'd like very, very much 80..... P: Oh, I know it. I appreciate that, sir. I'm not trying to gum the works at all. I just want to - - I do want to talk over thoroughly with you the problems and..... HMJr: Well, that's fair. That's fair. P: All right. HMJr: Thank you. P: I'll see you this afternoon. HMJr: Thank you. P: Good-bye. 201 February 21, 1942 MEMORANDOM FOR THE SECRETARY'S FILES: Meeting held in Mr. Bell's Office February 20, 1942 3:15 P. M. Present: For Treasury: Mr. White Mr. Foley Dr. Viner Mr. B. Bernstein Mr. Southard Mr. Friedman For States Mr. Hornbeck Mr. Hamilton Mr. Livesey Mr. Hiss Mr. Fox Mr. Currie Meeting discussed draft agreement submitted by Treasury. Mr. Hornbeck said that he found it a very admirable document, and then went on to suggest some minor changes. The two main points which were discussed were the provision for con- sultation between Secretary of the Treasury and China (Article II) and the question of repayment (Article IV). It seemed to be the sentiment of those present that it was desirable to provide for consultation although at the same time the request of the Chinese for no strings on the loan as to uses had to be kept in mind. With regard to repayment it seemed to be generally felt that the benefits which the United States is receiving and shall receive from China's activities in the war should offset at least in part our financial assistance to China. However, Treasury officials were particularly concerned with writing into the agreement some clause which would indicate that this financial aid is not a gift and that the Secretary has reason to expect that the United States would receive benefits in return for the financial assistance. The point was also made that if it was clear that some form of repayment was requested, more beneficial results from the loan could be anticipated. The Treasury undertook to redraft the agreement in light of the above discussions. I. S. Friedman Regraded Unclassified 202 WHEREAS, The Governments of the United States of America and of the Republic of China are engaged, together with other nations and peoples of like mind, in a cooperative undertaking against common enemies, to the end of laying the bases of A just and enduring world pesce securing order under law to themselves and all nations, and WHEREAS, The United States and China are signatories to the Declaration of United Nations of January 1, 1942, which declares that "each government pledges itself to employ its full resources, military or economic, against those members of the Tripartite Pact and its adherents with which such government is at war"; and WHEREAS, the Congress of the United States, in unanimously passing Public Law No. 442, approved February 7, 1942, has declared that financial and economic aid to China will increase China's ability to oppose the forces of aggression and that the defense of China is of the greatest possible importance, and has authorized the Secretary of the Treasury of the United States, with the approval of the President, to give financial aid to China, and WHEREAS, such financial aid will enable China to strengthen greatly its war efforts against the common enemies by helping China to (1) strengthen its currency, monetary, banking and economic system; (2) finance and promote increased production, acquisition and distribution of necessary goods; (3) retard the rise of prices, promote stability of economic relationships, and otherwise check inflation; (4) prevent hoarding of foods and other materials; (5) improve means of transportation and communication; (6) effect further social and sconamic measures which will safeguard the unity of the Chinese people; and (7) meet military needs and take other appropriate neasures in its war effort. Regraded Unclassified 203 2 In order to achieve these purposes, the undersigned, being day authorised by their respective Governments for that purpose, have agreed as follows: ARTICLE I. The Secretary of the Treasury of the United States agrees to establish forthwith on the bonks of the United States Treasury & credit in the name at the Government of the Republic of China in the amount of 500,000,000 B. 8. dollars. The Secretary of the Teansury shall sake transfers from this credit, in such amounts and ats such times as the Government of the Republic of China shall request, to an account or accounts in the Federal Recerve Bank of les York in the name of the Government of the Republic of China or any agencies designated by it. Such transfers may be requested by and much accounts at the Federal Reserve Bank of Bew York may be drem upon by the Government of the Republic of China either directly (2 through such persons or agencies as it sholl authorise. ARTICLE II. China desires to keep the Secretary of the Treasury of the United States informed as to the was of the funds herein provided and to consult with him from time to time as to such use. The Secretary of the Treasury of the United States desdres to make available to the Corporment of the Supublic of China technical and other appropriate advice as to ways and means of effectively employ- ing these funds to schieve the purposes herein described. Technical problems that any from the to time orise in affectating the financial aid harein provided will be subjects of disoussion between the Secretary of the Treasury of the United States and the Government of the Regublic of Chins. Regraded Unclassified 204 3 ARTICLE III. The final determination of the terms upon which this financial aid is given, including the benefits to be retdered the United States in return, is deferred with the program of events makes clearer the final terms and benefits which will be in the matural interest of the United States and China and will promote the establishment of lasting world peace and security. In determining the final terms and benefits no interest charges shall be made for the financial aid herein pro- vided and full cognisance shull be given to the desirability of saintaining & healthy and stable encomie and financial situation in China in the post-war period as well 0.0 during the war and to the desirability of promoting sutually advantageous economic and financial relations between the United States and Ohina and the betterment of world-wide economic and financial relations. ARTICLE IV. This Agreement shall take effect 85 from this day's date. Signed and sealed at Washington, District of Columbia, in duplicate this day of , 1942. CM behalf of the United States of Amorica. Secretary of the Treasury On bahalf of the Republic of China Regraded Unclassified 205 February 20, 1942 4:19 p.m. Sumner Pike: Yes, Mr. Secretary. HMJr: Mr. Pike, Mr. Purcell is sitting here with me. P: Yeah. HMJr: And he's been appealing to my sympathies and one thing and another, and I'm just a soft- hearted fellow. P: Yeah. HMJr: This is the suggestion that I made. I don't knew whether you like it or not - I mean, to be fair to SEC and ourselves P: Yeah. HMJr: and I said, "Why not let us have your services and let's break this chain which 1s around my neck," you see? P: Yeah. HMJr: And then after you've been with us a couple of months and you can decide how important that is and how SEC - you could decide - we could - which way you'd go. P: Yeah. HMJr: And that would - I think from what Purcell tells me, that would give him a chance te think about whether he wants to fill your vacancy and so forth and se on. Now, when I say it, I think it's a compliment to ask for SEC for somebody. P: (Laughs) HMJr: And Justice said that when they asked us for Bob Jackson to try a case for them, we considered it was a compliment. P: Well - (Laughs) - does that impress him very much? HMJr: (Talks aside) Does that impress you? Regraded Unclassified 206 - 2 - P: (Laughs) HMJr: I think I made a dent. P: (Laughs) Good. HMJr: I told him not to trade too hard, and he's asked to let me know temorrow morning, which is only fair. P: Yes. HMJr: But I frankly want you very, very badly. P: I think that might case the situation if Ganson's willing that - I thought of that on the way back this morning as a possible way out, because Gansen's right in that there are some real repercussions over here if anybody takes a hop at this moment. HMJr: Well, this wouldn't be - this would - we'd word it 50 that we'd ask the SEC to lend us one of their Commissioners. P: Yeah. HMJr: Lend the Treasury one of their Commissioners to help them, and I think that if the Treasury goes to the SEC for help, it isn't - well, I..... P: Well, I don't HMJr: I think it's a compliment. P: Well, I den't see why our Chairman isn't seftening up at the moment. You've certainly got me softened up. HMJr: I've got you softened up? P: Yeah. HMJr: Well, I don't know how to soften them up, but he looks like a nice fellow. P: (Laughs) Well, I guess he'll probably give in 207 - 3 - over night. That would be my guess. HMJr: Well, I wanted to talk to you in his presence. It appeals to you? P: Yeah. Yeah. HMJr: Well..... P: I think on the breaking up thing, the reper- cussions wouldn't be anywhere near as severe on that basis as they might on the other. HMJr: Well, I can see he's just taking this thing over and he doesn't want..... P: Well, he's on quite a spet, you know. There was a stink that lasted a month or two over the whole thing, and Gansen's in a teugh spet; and I don't want to do anything that will make a pretty tough job anyway any tougher for him. HMJr: Well, we can help maybe in other ways, too. P: Yeah. HMJr: I mean, with the SEC. P: Yeah. I kind of like that. HMJr: You kind of like that? P: Yeah. HMJr: Okay. P: All right, sir. HMJr: We'll - he said he's geing to talk to you and..... P: I'll be here when he gets back. HMJr: Right. P: Yes, sir. HMJr: Thank you. Regraded Unclassified 208 February 20, 1942 4:30 p.m. HMJr: Hello. Operator: Mr. Rouse. HMJr: Hello. Robert Rouse: Good afternoon, sir. HMJr: Helle, Bob. You seem to have been doing a swell job down there. R: This is the brightest minute of the week. HMJr: Really? R: Yeah. HMJr: How do you mean? R: Well, we took in six million, four today on the two'e. HMJr: Yes. R: But at the close, the Central Hanover came in and went to the dealers and said, "If you boys are patriotic, we are; and we'll take some of these two's on at par." HMJr: Oh, wonderful. R: So they turned some, and we saw to it they couldn't get too many. HMJr: I see. R: And on the two and a quarters, I know of two or three outright sales of five million each today, and in other sections of the list there's a demand in the sense that the boys have been going over and look at what their taxes are going to be, and they've got to buy more income. HMJr: I see. Regraded Unclassified 209 - 2 - R: And time is helping it..... HMJr: Good. R: 80 that the picture looks & good deal better tonight than it has any day this week. HMJr: Fine. R: Bonds got up as high 8.8 twenty-two bid, and closed, oh, at least nineteen bid. It's not very big, but there isn't any sellers; they're pretty well cleaned up now. HMJr: Well, when you think of all the private issues were called off and that we just went through with it, I think it's pretty good. R: Yes. And I think as it wears along the fact that we did a billion and B. half and everybody is down to earth again won't do us any harm. HMJr: How much did we buy of the two and a quarters. R: Oh, I haven't the exact figures in my mind, but it's quite a small amount. HMJr: Yeah. Right. R: It - well, if I were to guess, offhand, it would be about twenty million. HMJr: Right. And of the two's? R: The two's, about thirty. HMJr: Well, that's not bad. R: No, it's not bad at all. It will - let's see, it will work out twenty-nine - fifty-eight million about all together. HMJr: Well, after all, we're handling bigger and bigger issues and we'll have to - when we support it'll take more money. R: Yes, and I think we'll Just have to recognize it Regraded Unclassified 210 - 3 - as part of the cost of doing business. HMJr: That's right. R: I think there's a - it can be handled practically if we don't get too theoretical about it. HMJr: That's right. Well, thank you very much. R: Thank you for calling. HMJr: How's your sinus? R: It's better. HMJr: Good. Sounds better. R: I'm feeling a good deal better. I've got it fairly well cleaned up. HMJr: Good. Well, take care of it. R: Thank you very much. HMJr: Good-bye. R: Good-bye. Regraded Unclassified 211 February 20, 1942 4:50 p.m. ENJr: I understand you called me last night. Aubrey Williams: Well, it's very kind of you to return it. I just had a brainstorm. I saw this picture of Donald Duok HMJr: Yeah. W: and I was 80 terribly impressed with it that I wondered if you might not work something in the way of a public support of that thing. HMJr: No. W: It seemed to me se darned good that - are you going to be able to pay for it? HMJr: Oh, we paid for it. W: oh, you did? HMJr: And I told the Committee I'd pay for it. W: Oh. HMJr: We're all right on that. W: Well, I was wondering - you know this bomber idea of yours is going over big..... HMJr: Yeah. W: and I wondered along - the people might take a pleasure and a joy in throwing in a quarter, fifty cents, or & dollar for a prope- sition like that and feel they had & part in spreading the gospel. HMJr: Well, I think - I appreciate your thinking of us, but we had the money and I told the com- mittees we were going to pay for it and we went ahead and did. W: Uh huh. 212 - 2 - HMJr: And we're going ahead and making another one. W: Good. I thought it was perfectly marvelous. HMJr: So we're not going to let them stop us. W: The enthusiasm of the people after it was over was the complete justification. HMJr: Well, it's awfully nice to hear it, because I think that Disney really did quite an unusual job. W: Yes, he did. HMJr: Yeah. W: Well, I just wanted to give you that idea. HMJr: Well, thank you, but we happen to be all right this time, but we might not have been. W: Fine. HMJr: Thank you. W: Good-bye. Regraded Unclassified 213 FEB 20 1942 Dear Senator Downey: The nice things you said on the floor of the Senate last Tuesday in connection with our tax collection and defense bond sales efforts have just been brought to my attention. Please accept my personal thanks for your hearty support. Sincerely yours, (Signed) 1. Horgenthan, 100 Secretary of the Treasury. Hon. Sheridan Downey, United States Senate. n.me. copies to Thompson and they HAR:HMC:EHF:vls - 2/20/42 Regraded Unclassifie 214 FEB 20 1942 Dear Senator Barkley: Your recent statements to the Senate commending the Donald Duck film and urging the Senate and its employees to participate in the payroll-savings plan for the purchase of Defense Bonds have come to my attention. As always, your remarks have been of great help in our program and I want you to know they are deeply appreciated. Sincerely yours, (Signed) 1. Morgenthaw, IN Secretary of the Treasury. Hon. Alben W. Barkley United States Senate. n.m.c. Copies to Thompson NOT:hop 2/20/42 toly Regraded Unclassified 215 FEB 20 1942 Dear Mr. McCormack: The remarks which you made in the House on Wednesday urging members and their employees to participate actively in the payroll-savings plan for the purchase of Defense Bonds have been brought to my attention. Your statements were very effective and I want you to know that your support of the defense bond program is sincerely appreciated. Sincerely yours, (Signed) 8. Norgonthan, IN Secretary of the Treasury. Hon. John W. MoCormack n.m.e. e. House of Representatives. Copins to Ahompoon NOTshep 2/20/42 and tolay Regraded Unclassified 21 DEDWIN SKILLMAN OFFICERS EXECUTIVE SECRETARY WILLIAM - T. Cruze WILLAAM V VERTISING CLUB - Y of Baltimore TREASURES WATHER F. OFFICES AND CLUB ROOMS: SUITE 1222 EMERSON HOTEL BALTIMORE, MD. KARL F. STENWARK PRIVATE TELEPHONE: CALVERT 6150 - COURSEL BOARD OF GOVERNORS February 20, 1942 as OFFICER INCLUDED) - L ANIMANA, Ja. Louis 5. ASHMAN Honorable Henry Morgenthau, Jr. J. O. BLARKLY Secretary of the Treasury Runi W. Washington, D. C. C. BURRE WILLIAM H. Grocan Dear Mr. Secretary: S.L HARMERMAN J. TOUCHETUNE JONES The Advertising Club of Baltimore was singularly Joseph KATE fortunate in having you as its guest speaker last Saturday C MARTLAND KELLY evening, when you gave the nation, through our club, your BENJAMIN G. KLINE masterful address, J. R. LAMB E. H. LANDAUER In my opinion this was one of the very best Roy B. LANHAM addresses you have thus far made. CHARLES T. LEVINESS B. F. LITEINGER Assuredly, we would not have held an annual E. LESTER MULLER banquet this year if you had not graciously consented to Twenness A. Newhore address us, thus enabling us to devote the banquet to A. G. SCHOTTA National Defense. Louis E. SWECTER RATWOND 5. TOMPKING I think your reference in your address to our D. STRART Were Commander-in-Chief was superb. You may be interested to know that we are still active in our efforts with Defense Bonds and Stamps. Syracuse, New York, wired us for particulars, and one of our guests purchased $10,000 of bonds on Monday. It was indeed a real pleasure to meet you, and I know you will be happy to learn that you gave 50 many folks in Baltimore and millions of the radio audience so much assurance and real enjoyment. Wishing you all power in the continuance of the great work you are doing, I am, with real appreciation, Sincerely yours, M.T.Chied W.T.Childs President 6 S. Calvert Street egw Regraded Unclassified 217 February 20, 1942 Dear Dave: I am very sorry to learn from your letter of February 19 that we are about to lose your services at the Treasury. You have been of immense help in your few months here, and I appreciate all the assistance that you have given. More than that, it has been a personal pleasure for me to have had you as a member of my Treasury family. Now that you are going into the army, I should like you to know that all our good wishes will go with you, in whatever part of the world you may be serving. Sincerely, (Signed) Henry llorgenthau, Jr. Mr. Dave H. Morris, Jr. Treasury Department. FK/hkb Tele-thompson Phatile-n.mc. Photo File -n.m.c. Regraded Unclassified treasury department WASHINGTON February 19, 1942 Dear Mr. Secretary: As I told you & little while ago, I have just received orders to report on Monday morning for army duty. Under these circumstances I hereby tender by resignation as your Assistant, to be effective Saturday, February 21st. Working for you has been one of the most stimulating and delightful experiences of M7 life and I only regret that I cannot be in two places at once so as to continue working here and also fulfill my new assignment. With kind personal regards and best wishes for your ever continuing success in the wonderful job you are doing, I an Very sincerely yours, Dave H. Morris, Jr. The Honorable The Secretary of the Treasury WEFENSE BUY Regraded Unclassified 219 February 20, 1942 Dear Miss Monroe: "Minute Man Defense Savings Campaign Your generous offer to serve as a and to conduct "Victory Sings" throughout the nation is a most welcome contribution to the nation's war effort. A program of community singing in com- munities throughout the country cannot fail to foster that spirit of united devotion to our cause which is so essential to victory. I know that your efforts will be of great help to the Treasury Department in its campaign for the voluntary participation of all our people in the financing of the war. Sincerely, (Signee) 1. Horgenthau. JR. Miss Lucy Monroe, RCA Victor Manufacturing Company, Camden, New Jersey. FK/hkb Copies n.m.c. Eshampaon Original sent to Mr. D uffers office for mailing Regraded Unclassified 220 February 20, 1942 Harold Graves Eugene Sloan Secretary Morgenthau The art in the advertisement in the Evening Star, paid for by Hahn, entitled "They're giving their all; won't you lend yours?" às at least fourth grade. I would like to know whether the drawings were done in the Treasury. Please give me a memo on this today. This is the thing that I complained to Sloan about at least two weeks ago. If this work is done in the Treasury I wish that the art end of it would be referred to Mrs. Morgenthau and Olin Dows as I am confident that with their help we could produce advertisements which would be much more effective and that the art work would be the best. I would like an answer to this memorandum by this afternoon. Thank you. memo submitted 2/20/42 Regraded Unclassified TREASURY DEPARTMENT 221 INTER OFFICE COMMUNICATION DATE 2/20/42 TO Mr. Sloan FROM Mr. Mahan The advertisement entitled "They're Giving Their All; Won't You Lend Yours?" which ap- peared last night in the Evening Star was one of the series prepared and released at the same time as the portfolio which the Secretary discussed with you. The artwork for this advertisement was done in our own shop. I am sure the reorganization which we have completed this week will enable us to turn out advertisements which will be more satisfactory to everyone than this first series. In connection with the meeting on Tuesday afternoon with Mrs. Morgenthau and Mr. Dows, I will arrange to exhibit and discuss adver- tisements as well as posters. It will be of help to us in our reorganization of the Creative Department to get their comments. 2/20/42 Regraded Unclassified Feb 20 th 1942 1st droft 222 President Green and members of the American Federation of Labor: This pledge of yours to buy a billion dollars of Defense Bonds in 1942 is a magnificent example to the whole country. It is the biggest single pledge that has come to us from any single organization. It amounts to about $200 for every one of your five million members. If you fulfill and exceed your pledge -- as I am confident that you will -- you will be winning a victory as important in its way as a victory on the battlefield. For you will be proving once more that the American people here at home are working and saving to help win this war for freedom. This war is a crisis for the whole labor movement in more ways than one. Unless we and our allies win it, Regraded Unclassified - 2 - 223 there will be no survival of free trade unions, no abroad. liberation of the millions of workers now enslaved, R' no continuance of the rights that American labor has won in generations of struggle, no better future for the working men and women of the world. Upon american labor the outcome depends everything that you stands for, american labor itself and its everything that you dreams of for yourselves and your children. Our American future will be determined not only by events on the battlefields but by our response, here and now, on the home front. Most of you are fighting on the assembly lines in the Battle of Production, which may become one of the decisive battles of the world. All the giant strength of Regraded Unclassified - 3 - 224 American industry is being mobilized to produce the weapons and materials that will smash our enemies; all the skill and eaergy of American labor are going into that battle, and they are going to win it in the end. Yet we shall be hampering our own efforts to produce if we then go into the market place to buy unnecessary goods that compete with our war production. I am reminded of an advertisement in the New York papers a few days ago showing Hitler pinning B. medal on an American man and woman; the caption was "For Distinguished Services to the Axis -- For Hoarding." We know that it is unprofitable and unpatriotic to hoard rubber, sugar or any commodity in times like D-A - 4 - 225 these, but hoarding is only an extreme example of 8 more widespread evil. It is just 88 unprofitable, undelpful a great many things just as unpatrictic for us to buy anything that we can do without until the end of the war. If the Battle for Production is to be won -- and I know that labor is determined that it shall be won -- we shall have to cut down on our own everyday expend- itures, to do without new gadgets and luxuries, to keep our buying strictly. to necessities. The more goods we buy now for civilian use, the more we may have to ration as those goods become scarce and as the war goes on. That is an additional reason for continuing to buy Defense Bonds every week, every pay day, to the D-A - 5 - 226 very limit of our ability. Bond-buying is the very opposite of luxury buying in wartime. It helps to keep prices in check. It helps to clear the cecks for war production. It helps the Government to finance the colossal costs of war, and it will help you by giving you 8. reserve of spending money after the war when you will need it most. I am glad that in your billion dollar campaign you are emphasizing the importance of continuous week-by-week investment out of your pay checks. The money that we need most urgently is new income, week- by-week income, the income that would otherwise be spent on unnecessary things. It does not help to finance the war, or to keep inflation down, to buy Defense Bonds by taking money out of savings bank D-A 227 - 6 - accounts; for that money is already out of the stream of purchasing power, and it is already largely invested in other Government bonds. The best way you can help in financing the war and in safeguarding your future is to buy Defense Bonds out of your new earnings, regularly and as much as you can. In this effort the Treasury is relying upon all the five million members of the American Federation of Labor, and especially upon the shop stewards and presidents of locals. I should like to say a few words in conclusion to the shop stewards and local presidents who may be listening to me tonight. You are my partners in this payroll savings enterprise. You are the ones who know how much your members are D-A Regraded Unclassified - 7 - 228 investing in payroll savings plans. You are in a position to know whether 8 particular worker is doing all that he can, or less than he should. I am relying on you to tell your members throughout the year about the advantages of payroll savings; to keep track, in a friendly way, of what your members are investing; and to see that they set aside every dollar they can, for their own good and their country's good. As I have said repeatedly, this is not a token war, and it cannot be paid for with spare change. We are engaged in 8. war of desperate seriousness. It is 80 serious that it allows no margin of safety for any of us. Remember, whoever relaxes helps the Axis. - 8 - 229 This is a time for sweat, for work, for saving, for maximum effort in every phase of the war effort. I have such confidence in American labor that I know you will put forth that maximum effort, voluntarily, willingly, cheerfully, whatever the cost, however long and hard the war may be. D-A